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Part Five ACCOUNTING MANAGEMENT 22-1 INTRODUCTION All accounting processes can be improved in some manner in order to increase the overall efficiency and effectiveness of the accounting department. Such improvements are known as best practices. They can range from such simple expedients as the creation of a signature stamp to increase the speed of check signing to the installation of advanced document management systems that allow one to avoid most records management issues. The full range of best practices would encompass an entire book (and does: for a full treatment of this topic, please refer to Bragg, Accounting Best Practices, Second Edition, John Wiley & Sons, 2001). This chapter contains a number of the more common best practices, listed in alphabetical order by functional area, as well as a graphical represen- tation of the approximate cost and implementation time needed to install each one. Any best practice that requires a high cost has a notation of three stacks of money, while those best practices requiring fewer funds have a correspondingly smaller number of stacks. Similarly, a best practice requiring a lengthy installation time has a notation containing three alarm clocks, while those with shorter installation times have a smaller number of clocks. 22-2 BEST PRACTICES • Accounts payable: accept electronic data interchange invoices. Many larger companies with advanced operational capabilities prefer to issue invoices to their customers by electronic data interchange (EDI), rather than with a paper invoice, because of the increased transaction speed and reduced cost of this approach. A company can alter its internal systems to accept these invoices by creating an interface between its accounting system and its packaged EDI acceptance software, so that an incoming EDI transaction will be sent directly to the accounting system in the correct format without the need for any manual re-entry by a keypunching staff. 235 CHAPTER 22 Best Practices 22-1 INTRODUCTION 235 22-2 BEST PRACTICES 235 22-3 SUMMARY 257 Though a very efficient approach to the entry of supplier invoices, the creation of a customized interface is both lengthy and expensive. Cost: Installation time: • Accounts payable: audit expense reports. Rather than review every line item on every expense report submitted, the accounting manager can schedule a random audit of a small number of expense reports, which will be indicative of any problems that may be present in other, unaudited reports. If so, either the scope of the audit can be expanded, or else the accounting staff can focus on just those issues that are uncovered in a broader sample of expense reports. Also, if the audits of certain employees continue to reveal ongoing problems, those individuals can be scheduled for full reviews of all expense reports submitted. By taking this approach, a company can still spot the majority of expense report exceptions, while expending much less effort in finding them. Cost: Installation time: • Accounts payable: automate recurring payments. A few payments, such as space rental, copier lease, and subscription billings, are the same every month, and are likely to last for some time into the future. To avoid the repetitive entry of these items into the accounts payable database, many off-the-shelf accounting packages allow one to set up automatically recurring payments that must only be entered in the system one time. This option should only be used if it allows for a termination date, since automated payments may otherwise inadvertently pass well beyond their actual termination dates. Cost: Installation time: • Accounts payable: automate supplier query responses. The accounts payable staff can spend a large part of its time answering queries from suppliers who want to know when they will be paid. The staff time devoted to this activity can be sharply reduced by installing a computerized phone linkage system that steps suppliers through a menu of queries, so that they can find out the status of payments directly from the computer system. It is also possible to do this through an Internet site. Some employee interaction with suppliers will still be necessary, since there will be cases where invoices are not recorded in the system at all, and so will require manual intervention to fix. Cost: Installation time: 236 Ch. 22 Best Practices • Accounts payable: automate three-way matching. The most labor-intensive effort by the accounts payable staff is to manually compare receiving documents to supplier invoices and internal purchase orders to ensure that all payments made to suppliers are both authorized and received in full. To avoid much of this work, a number of high-end computerized accounting systems will conduct the comparison automatically, and warn the staff when they find inconsistencies. However, this means that the purchasing staff must enter its purchase orders into the same system, as well as the receiving staff, which requires extra coordination with these departments. Cost: Installation time: • Accounts payable: create an on-line purchasing catalog. Employee purchases of office supplies and maintenance items comprise a large part of the purchases made by most companies, as well as a correspondingly large part of the accounts payable transactions that it must handle. To avoid this payable work, an on-line purchasing catalog can be created that itemizes all company-approved items; employees can select items directly from this catalog, and place an on-line order. These orders will be batched by the computer system and automatically sent to suppliers, who will ship directly to the ordering personnel. Suppliers will then issue summarized invoices to the company, which greatly reduces the paperwork of the accounting staff. It will also reduce a large part of the work of the purchasing staff. However, setting up the system and coordinating its installation with suppliers results in a very lengthy installation interval. Cost: Installation time: • Accounts payable: eliminate manual check payments. There are some instances when checks are needed on such short notice that they cannot be included in the scheduled check runs of the accounting staff. Instead, someone must obtain approval on short notice, cut a manual check, have it signed, and log it into the computer system. To avoid these time-consuming steps, one can promulgate a general prohibition on issuing this sort of payment, and can increase the use of petty cash if this will allow the accounting staff to replace manual check payments with cash payments. Cost: Installation time: • Accounts payable: issue payments based on purchase order approval only. The typical company payment requires multiple approvals: on the purchase requisition, the purchase order, supplier invoice, and check. A much simpler approach is to require a single approval on the purchase order and ignore all other required 22-2 Best Practices 237 approvals. By doing so, the amount of time required to complete accounting transactions can be substantially reduced, since documents must no longer be sent to managers for approval and sit in their “in” boxes. However, this means that the con- trols over purchase order approvals must be iron-clad, so that there is no chance of a supplier payment being sent out without some sort of authorized approval. Cost: Installation time: • Accounts payable: issue payments based on receipts only. As previously noted in a preceding best practice, one of the most time-consuming aspects of the accounts payable function is the matching of receiving documents to purchase orders and supplier invoices. To avoid this entire approach, a company can have the receiving staff access purchase orders through a computer terminal, and approve received items on the spot through the terminal. The company then issues payments to suppliers based on the prices listed on the purchase orders, rather than waiting for a supplier invoice to arrive. This completely eliminates the matching process. However, this approach requires a great deal of computer software customization, the integration of sales tax tables into the software, and the cooperation of suppliers in accepting payments from the system. This should be considered an advanced best practice that requires great expertise to install. Cost: Installation time: • Accounts payable: pay via automated clearing house transactions. The check payment transaction involves printing checks, attaching backup materials to the checks, sending them out for signatures, then attaching check stubs to supporting documents and filing them away, while the checks are mailed. A much simpler approach that avoids all of these steps is to obtain the bank routing numbers and account numbers from all suppliers, and then send payments directly to these accounts with automated clearing house transactions. This can be accomplished with customized accounting software, but is much easier if the software already contains this feature; it is normally only found on more expensive packages. Cost: Installation time: • Accounts payable: pay with purchasing cards. The bulk of all paperwork dealt with by the accounts payable staff is for small-dollar items. Many of these purchases can be consolidated by distributing purchasing cards (for example, credit cards) to those employees who most frequently make purchases. By doing so, a company can reduce the amount of paperwork to a single supplier statement each month. Furthermore, some cards can be set to only allow a certain dollar amount of purchases per day, purchases from only certain types of stores, and even to show 238 Ch. 22 Best Practices daily purchases on an Internet site, where a supervisor can immediately restrict purchasing levels if spending habits appear to be a problem. On the downside, it can be difficult to report use taxes based on purchasing card receipts, which may lead to slightly higher use tax remittances. Cost: Installation time: • Accounts payable: send supplier invoices to an EDI data entry shop. When a company creates the capability to accept on-line invoices from suppliers via EDI trans- missions, it will find that it must still maintain a clerical staff in order to conduct data entry on those paper invoices still being mailed to the company by some suppliers. It can avoid this expense by re-mailing the invoices to a data entry out- sourcing shop that will re-enter the invoices into an EDI format and transmit them to the company, thereby ensuring that 100% of all invoices will be received in the EDI format. A good way to avoid the time delay associated with re-mailing invoices to the data entry supplier is to have all suppliers (those not using EDI) send their invoices to a lockbox that is accessed directly by the supplier. It may also be possible to charge suppliers a small fee if they do not use EDI, thereby covering the cost of the data entry work. Cost: Installation time: • Accounts payable: sign checks with a signature stamp. One of the slowest parts of the check creation process is finding an authorized check signer and waiting for that person to sign the checks (which could be days if the person is busy). A better approach is to purchase a signature stamp and have someone on the accounting staff stamp the checks. However, the stamp must be kept locked up in a secure loca- tion, so that no unauthorized check signing occurs. Also, since there will no longer be a review of checks before they are sent out, there must be a strong control over payments earlier in the process, by requiring purchase order authorizations before any goods or services are ordered from suppliers. Cost: Installation time: • Collections: approve customer credit prior to sales. The accounting or finance staff will sometimes find that it is put under considerable pressure by the sales staff to give credit approval to sales already made to prospective customers. Since the sales staff will earn a commission on these sales, the pressure to approve credit can be quite intense, even if the customer does not have a sufficient credit history to deserve it. This can result in an excessive amount of bad debt write-offs. To avoid this situation, the sales and accounting departments can work together to create a list of sales prospects and determine credit levels for them, based on publicly avail- 22-2 Best Practices 239 able credit information, before the prospects are ever contacted. However, this is not a cost-effective solution if new customers are of the walk-in variety or if average per-customer sales are so low that the cost of conducting credit checks makes this best practice too expensive to implement. Cost: Installation time: • Collections: authorize small balance write offs with no management approval. Customers will occasionally pay for slightly less than the amount of an account receivable, leaving a small balance cluttering up the accounts receivable database. It can be quite time-consuming to create a permission form for signature by an accounting manager that will lead to the elimination of these small balances. A better approach is to create a policy that allows the collections staff to write off small balances without any permission from management personnel. Cost: Installation time: • Collections: automate fax delivery of dunning letters. A computer can be attached to the accounting computer system that is dedicated to sending faxes. This machine is quite useful if it is linked to the collections database, so that reminder faxes can be sent to those customers whose payments are overdue. The severity of the word- ing on these faxes can increase over time as the number of days late increases. Faxes can even be sent slightly prior to payment due dates, to jog the memory of customers in regard to payment. However, this can be a very expensive option if a customized software linkage must be created between the collections database and the automated faxing system. Cost: Installation time: • Collections: automate fax delivery of overdue invoices. The preceding best practice for faxing dunning letters can be expanded to also send customers copies of their overdue invoices. In addition, it can be used by the collections staff to only send invoices to those customers to whom collection calls have been made, and who do not have the invoice in hand already. The same software customization issues apply to this best practice as the last one. Cost: Installation time: • Collections: freeze pending customer orders. If a customer is not paying its overdue invoices, then it certainly makes no sense to send more goods to it, so that even more 240 Ch. 22 Best Practices accounts receivable can become overdue. Consequently, the collections staff should have access to the database of pending customer orders, with authority to halt any fur- ther shipments until payment is received for prior shipments. This process can be automated through many accounting systems by setting up maximum credit levels for each customer and allowing the system to automatically freeze shipments once those credit limits are reached. However, some recurring manual review of frozen shipments should be made in order to keep from reducing relations with key customers. Cost: Installation time: • Collections: receive bankruptcy notices from collection agency. A company may not realize that a customer has declared bankruptcy, and so will not assert its rights in regard to unpaid invoices, while also continuing to ship to the customer (thereby putting even more accounts receivable at risk of not being paid). To avoid this problem, the Dun & Bradstreet credit agency has an automated bankruptcy notification service that will fax bankruptcy notices to a company for selected customers as soon as a bankruptcy filing becomes public knowledge. Cost: Installation time: • Collections: print separate invoices for each line item billed. Sometimes, customers will take issue with one line item on an invoice and refuse to pay the entire invoice until the pricing on that one line item has been resolved, which lengthens the overall interval for collections. To avoid this problem, a company can consider issuing a separate invoice for each line item, rather than clustering them onto a single invoice. This will reduce the average collection period, but may not be cost- effective if the average price for each line item is quite small. It can be a very effective approach, however, for large-dollar line items. Cost: Installation time: • Collections: send out repeating invoices before the scheduled date. If a company has a database of prices that it knows it will charge customers on set dates, such as for subscriptions or ongoing standard maintenance fees, it can create and mail the invoices a few days prior to the dates on which they are scheduled to be sent. By creating invoices early, the receiving companies have more time to route the invoices through their internal approval processes, resulting in slightly earlier payments to the issuing company. This is a very inexpensive way to improve the speed of cash flow. Cost: Installation time: 22-2 Best Practices 241 • Collections: stratify required collection calls. There can be an overwhelming number of potential collection calls to make, and not enough employees to make the calls. In these situations, one should sort the overdue invoices by dollar size, and target the largest ones for the bulk of all calls. This means that the collections staff will focus its efforts on those invoices with the greatest potential dollar return in exchange for the effort put into the calls. This does not mean that small dollar invoices will be ignored, but the related calls may be delayed or fewer in number. Cost: Installation time: • Commissions: automate commission calculations. The calculation of commissions can be a painful process of ascertaining the latest commission deals struck by the sales manager, combing through all of the invoices from the latest month to calculate the preliminary calculation, sending the resulting commission reports to the sales staff, and then dealing with irate sales personnel who think that they have not been fully compensated. A better approach is to first standardize the commission calculation system so that it can be automated through the accounting computer system. By doing so, there will be far fewer complaints from the sales staff about supposedly incorrect commission calculations, no chance of the accounting staff making calculation errors (since the computer is now doing it for them), as well as a much faster completion of this key step in the month-end closing process. Cost: Installation time: • Commissions: calculate commissions based on cash received. The sales staff is most concerned with completing a sale to a customer, which it usually defines as the moment when the customer signs a purchase order. However, this ignores the ability of the customer to pay for what it has ordered, which can result in a high level of bad debts. To avoid this problem, the sales staff should be compensated based on cash received from customers. By doing so, the sales staff will be more likely to verify the creditworthiness of customers before selling to them, and will also be more likely to assist in collection efforts. Cost: Installation time: • Commissions: simplify and standardize the commission payment structure. As noted earlier in the “automate commission calculations” best practice, a company’s commission structure can be an extremely complex one that is difficult to calculate, and that can take a considerable amount of practice to calculate properly. Even if automation of the process is considered too difficult, one can still work with the sales manager to improve the simplicity of calculations. This results in much less 242 Ch. 22 Best Practices [...]... volume 15. 00 $ 14. 85 14.80 14. 75 — 14,000 21,000 25, 000 31,000 91,000 $ 210,000 $ 311, 850 $ 370,000 $ 457 , 250 $1,349,100 $1,048,000 $1, 057 ,000 $1,061,000 $1, 053 ,000 $4,219,000 Region 1 $ 123,000 $ 95, 000 $ 82,000 $ 70,000 $ 370,000 Region 2 $ 80,000 $ 89,000 $ 95, 000 $ 101,000 $ 3 65, 000 Region 3 $ 95, 000 $ 95, 000 $ 65, 000 $ 16,000 $ 271,000 Region 4 $ 2 65, 000 $ 2 65, 000 $ 320,000 $ 3 75, 000 $1,2 25, 000... Region 4 $ 2 65, 000 $ 2 65, 000 $ 320,000 $ 3 75, 000 $1,2 25, 000 Revenue subtotal $ 56 3,000 $ 54 4,000 $ 56 2,000 $ 56 2,000 $2,231,000 Revenue grand total $1,821,000 $1,912, 850 $1,993,000 $2,072, 250 $7,799,100 Quarterly revenue proportion 23% 24 .5% 25. 6% 26.6% 100.0% Alpha 11 .5% 16.3% 18.6% 22.1% 17.3% Beta 57 .6% 55 .3% 53 .2% 50 .8% 54 .1% Revenue subtotal Product Line Beta: Revenue subtotal Product Line Charlie:... paperwork within the accounting department It is better to reduce the number of invoice parts to the absolute minimum required This may include sending just one invoice copy to the customer, and retaining one other copy for internal reference purposes Cost: Installation time: 22-2 Best Practices • 253 Management: create a policies and procedures manual Though a highly experienced accounting staff may... number of data resources in order to obtain information about additional best practices CHAPTER 23 Budgeting 23-1 23-2 23-3 INTRODUCTION 258 THE SYSTEM OF INTERLOCKING BUDGETS 258 A SAMPLE BUDGET 267 23-4 23 -5 23-6 23-7 THE FLEX BUDGET 284 THE BUDGETING PROCESS 2 85 BUDGETARY CONTROL SYSTEMS SUMMARY 292 289 23-1 INTRODUCTION Budgeting is one of the most important activities that an accountant can engage... offering the option to store records for more accounting periods on-line Though there can be a considerable additional storage cost associated with this activity, plus a slower computer access speed, this can greatly reduce the need to store archived paper documents An additional benefit is that accounting reports can be created that will 22-2 Best Practices 2 45 automatically generate comparison reports... updated at the end of each month and issued to the entire accounting staff, with the due dates of each recipient highlighted on it This requires constant updating as requirements change Cost: Installation time: • Management: measure key departmental performance items The accounting manager does not have any idea whether the performance of the accounting department is improving or degrading over time... large number of possible variances from the budget or historical records that the accounting staff could investigate before closing the accounting books Such investigation takes a great deal of time, so pursuing all possible variance analyses will interfere with the timely closing of the books To avoid this trouble, the accounting manager should create a rule that forbids all variance analysis if variances... standard journal entry forms that are cross-referenced in the closing checklist By doing so, the accounting staff can verify that all required journal entries have been completed, and that the same journal entry format is used during every closing process Cost: Installation time: • General ledger: copy the chart of accounts for all subsidiaries The consolidation of accounting results for all corporate subsidiaries... complete its shipping documentation and deliver it to the accounting department There is also a risk that some of the paperwork will be lost in transit To avoid these problems, the shipping staff should be equipped with a computer terminal that allows them to directly enter shipping information into the accounting database Armed with this data, the accounting staff can issue invoices much more quickly... are slowly wending their way through the check posting process in the accounting department A better approach is to have customers send their checks directly to a lock box that is opened by the company’s bank, which will cash the checks and then forward the related materials to the company, from which it can post cash payments to the accounting system at its leisure This process can be quite sophisticated, . need for any manual re-entry by a keypunching staff. 2 35 CHAPTER 22 Best Practices 22-1 INTRODUCTION 2 35 22-2 BEST PRACTICES 2 35 22-3 SUMMARY 257 Though a very efficient approach to the entry of. Part Five ACCOUNTING MANAGEMENT 22-1 INTRODUCTION All accounting processes can be improved in some manner in order to increase the overall efficiency and effectiveness of the accounting department creating an interface between its accounting system and its packaged EDI acceptance software, so that an incoming EDI transaction will be sent directly to the accounting system in the correct

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