Is my bookeeping service trustworthy?

September 2011

"I'm on the board of a non-profit that outsources all bookkeeping functions--ticket sales, bill paying, bank deposits, taxes, financial reporting. I read recently about how a similar bookkeeping service embezzled millions of dollars from its clients, and I wonder how we could even start to verify the honesty of our own service provider. And ideally, I don't want to insult anyone by acting suspicious."

Mike: This is a train wreck just waiting to happen, and it's up to your CEO or executive director to take immediate steps to put cash controls in place. The CEO or another senior person in the organization should review bank reconciliations every month and should have access to all your bank statements, either in paper form or online. This person should also review all of the activity in your cash accounts, paying particular attention to checks and transfers that look unusual. Also, at least one person, such as the CEO, should be an authorized signer, and dual signatures should be required on all checks over, say, $5,000.

Don't worry about insulting your bookkeeping service. Frankly, I'm surprised that they've gone along with this arrangement. If one of their employees commits an act of fraud, at very least the bookkeeping service's reputation will suffer badly.

How can I rein in unbudgeted expenses?

April 2011

"Most of my department managers take their budgets seriously, but my marketing VP is a chronic impulse buyer. T-shirts, promotional videos, trade show program ads--he just can't resist a 'special' deal, and he's always convinced that his budget should be allowed to stretch for special circumstances. Usually I end up agreeing, even though know it's a terrible precedent. What should I do?"

Mike: It's always hard to ask managers to rein in their spending impulses when you're discussing one plausible-sounding expense at a time. A better strategy is to add up your marketing VP's total impulse spending for the year, then insist that he set aside this amount as a discretionary line item in next year's budget request. If you keep his total budget flat, the T-shirts and videos will have to compete against other expenditures that he probably feels have higher priority.

Of course, the cost-control message has to come from the top. You can create all kinds of rules and incentives, but ultimately the CEO has to set the spending tone for the whole company. If the boss routinely approves off-budget expenses, no one will take your cost controls seriously.

Who controls payment terms?

November 2010

""The payment terms on our standard order form are net 15 days. A new customer's accounts payable department has just sent us a purchase order that says their standard terms are net 60 days. Who wins?"

Mike: As the old saying goes, "He who has the gold makes the rules." But don't give up too easily. Often, these "rules" are quite negotiable. For instance, a small early-payment discount might be enough to get your check cut almost immediately. However, you'll probably only hear about this kind of flexibility if your controller or your accounting staff have friendly relationships with their counterparts in the customer's payables department. Best of all: Set up a face-to-face meeting if the customer is local.

Even without a friendly relationship, you may also find that your customer automatically pays a lot more promptly than their official terms might suggest. Big companies in particular are now so efficient at processing invoices that they often turn around payments within two or three weeks. The 60-day terms are a "just in case" legal provision for the rare occasions when there's a dispute or the paperwork gets scrambled.

Do I have to pro-rate maintenance agreements?

November 2010

"When our customers make annual maintenance payments, I've just noticed that my controller records the full amount as a current sale. I know we should be pro-rating these payments over the life of each contract, but making these changes retroactively will be a huge hassle. Should we bother?"

Mike: Of course it's a hassle. But the alternative is probably worse: Your financial statements aren't GAAP-compliant (a polite term for "accurate and honest"), and you'll almost certainly raise eyebrows when savvy investors, bankers, and advisors look at your numbers. You may also have a tax problem--though here you're probably over paying by recording revenue prematurely.

I understand that it can be complicated to record maintenance revenues on a month-by-month basis over the lifetime of each contract, and I know that some people will be confused by the “deferred revenue” account on your balance sheet. Nevertheless, you have to align your revenue recognition with the time period when you actually earn your fees. Any other approach is asking for trouble.

And yes, you should restate prior financial statements for this issue, and the restatement could be significant.

Should we reconcile our books to the last penny?

May 2010

"Most of our business involves small retail transactions. My controller spends several days every month trying to reconcile the checking account against the general ledger, and often there's a small discrepancy of a few dollars. Is there a rule of thumb for how exact we ought to be?"

Mike: The rule of thumb is that you should have no “unlocated differences” in your accounts. Zero. Nada. That's not as hard as it sounds, if you've computerized your accounting and your checking account reconciliation. You'll also find that businesses with lots of cash transactions often balance their accounts *daily*, rather than wait until the end of the month to wade through thousands of payments.

The reason for reconciling accounts down to the penny is simple: It's a basic security procedure. A common embezzlement technique is to skim off small, seemingly random amounts of cash from a large revenue stream that no one is checking closely. Over many years, these mysterious discrepancies can add up to literally hundreds of thousands of dollars. Then it's too late.

Why is my sales manager protecting deadbeats?

January 2010

"I'm supposed to be in charge of collecting receivables, but every time I lean on a slow customer my sales manager has a fit. The CEO just says, 'Work it out somehow.' Any advice?"

Mike: Before you can solve this problem, you need to get at the root cause. The most likely explanation is that your sales manager is nervous about his team's relationships with customers. Are there problems with product quality? Are customers being encouraged to buy more than they need or can afford? Are his sales reps writing what are essentially phantom deals ("pay us whenever you feel like it")? Unhappy customers tend to pay their bills slowly, and it's possible that your sales manager doesn't want the rest of the company to hear the bad news.

However, the other possibility is that you really are being too aggressive in your collection efforts. For instance, your customers may need several months to cut a check for year-end license renewals or support contracts because the paperwork gets bogged down in purchasing and legal reviews. Rather than nag your slow-paying customers, ask them if there's anything you can do to fast-track your invoices. You might be surprised by what they tell you.