How Good Is Your Accounting Department

A good accounting department can help you to make more money. Is your accounting department making you money or costing you money? One of the most important resources – or limiting factors – for your future growth is the usefulness of your accounting and management information. After all, information drives decisions, decisions drive actions, and actions drive results.

Phil’s Profit Points™ in Brief:

• A good accounting department reports on the past, the present and the future.

• The length of time that it takes to prepare the historical information will dictate how much time is left over in a month to prepare the current and future information.

• The marketing and operations departments need to provide timely, accurate and approved, information to the accounting department for assembly, analysis and distribution.

• If you receive your monthly financials within the first ten days – you get an A, within the middle ten days – you get a B, and within the last ten days – you get a C. What’s your score?

• A good accounting department can organize and distribute important operational and business information, such as the sales pipeline, order pipeline, and key performance indicators.

How Good Is Your Accounting Department?

Here is the information that you need to receive, at a minimum, from your accounting department.

The Past

The Present

Current financial information includes:

• Verified data on working capital (cash, accounts receivable, inventory, accounts payable).

• Total days to cash.

• Aging of accounts receivable and accounts payable. Aggressively collect any receivable over 60 days and train your customers to pay you promptly.

• Status of customer projects or orders to ensure everyone is happy.

• Supplier performance to monitor speed, quality, and value.

• Gross profit by product and service line, by customer, and by branch or location.

The Future

Future information includes the sales pipeline and order pipeline. Predicting future revenues and cash flows is the most difficult management role. Public companies do it all of the time, so you need to become more proficient at forecasting future revenues. This information includes:

• Sales pipeline, with probabilities of closing that are based on prior results. What happens if sales don’t materialize?

• Production pipeline, with weeks of production. What happens if orders are delayed or cancelled?

• Your budget is typically a fixed document. However, you can update the results on a rolling basis using a forecast. This would include your actual year to date results and your expected future results based on current levels of activity. The forecast gives you more management control and flexibility. If you miss your budget in the first quarter (Q1), then you can adjust your overall plan so that everyone receives relevant information with valid action plans.

Common Mistakes

Here are the most common mistakes that we see in accounting departments.

• The accounting department thinks their job ends when they hand the financial statements to the managers. It hasn’t ended; it has just begun.

• Managers who receive good information don’t take the time to use the information to analyze what happened or to develop plans.

• Information is too old to be useful for management decision making.

• Information is structured for external users, such as the banker, and is not structured to help managers make better decisions.

• The numbers aren’t explained to tell the story of what happened.

• If there is no story about what happened, it’s difficult or impossible to develop an action plan for the future.

• The financial reports do not influence managers to understand reality and improve results.

In Conclusion

I know many great people in accounting departments who want to help business owners and managers to grow the business and be more successful. It’s up to you to position them for success by having them translate the financial statements into practical advice.

Tough Question

Are your managers in denial about the accounting results?

From the Piggy Bank

My friend, Stefan, the police driving instructor, says that most car accidents are caused because people aren’t looking far enough ahead. The further ahead that you can look in your business, the more successful you will be.

Have a profitable week!