August 7, 2017
I recently facilitated the School for Financial Managers in conjunction with AICC. We have been running this course annually since 1995, with a couple of exceptions, and based on my count, this was the 20th time the course has been offered. This year I hosted 21 financial professionals just outside of Chicago, and we had discussions on converting operations and ways that financial professionals can make an impact on their companies. A common theme was the issue of speed versus accuracy in many facets of their responsibilities.
Accountants, as a group, tend to be more cautious and seek greater precision in their approach to things than the general public. We have been taught that our books must balance. The worksheets must cross foot and tie into the balance being analyzed. We set up and monitor controls and procedures, and deviation from these controls and procedures can open the company up to defalcations. Many financial professionals see their core function as bringing security and integrity to the company’s books and records.
The real world, however, is not usually a neat and tidy place in which to operate. For every rule, there are always exceptions. Events don’t always occur as you expect, and people make mistakes. Seeking perfection in a very imperfect world may be a noble cause, but is it practical? Should some things be tied out to the penny no matter how long it takes, and should other things simply be materially correct because extra time needed to make them more precise either takes too long or costs too much money? Who should be making these decisions?
Part of the problem is that most owners and general managers do not come from the world of finance, so they have difficulty managing and motivating their financial managers. Another serious issue is that many financial managers do not get intimately involved in operations, so much of what they do is based upon what they learned in the classroom and in previous positions, or what they are told by operational people. Additionally, every company’s “culture” has created lots of standard operating procedures that are rarely questioned. So, in most cases you have financial professionals who are cautious by nature, not generally too involved in operations, feel bound by industry convention and company culture, and have no clear mandate to change anything. Here are two instances how these might affect real-life behavior.
Monthly Financial Statements
During our meeting, many of the financial managers stated that they could get monthly financial statements done within three business days of month end. Others said that this was impossible in their environments, while still others said that while it was doable, it was not advisable due to a perceived loss of accuracy. In my opinion, many companies devote way too much time and effort trying to get their monthly financial statements “perfect.” The keys to a successful monthly statement are having a reliable inventory system and a reliable purchase order system, making sure the purchase and sales cutoffs are correct, and using common sense estimates for everything else. If some accruals are missed, does it really matter? Isn’t it more important to get the “materially correct” results to management quickly? I certainly think so. You need to let your financial professionals know that “materially correct” is OK in a monthly statement, and that speed is more important than very high accuracy.
Cost Accounting Analysis
Most converters spend a lot of time updating costing systems, and the financial professionals have been taught that costing is a science. Without allocating your costs back to machine centers and orders, the company will not be able to ascertain what things cost and are likely to make poor decisions on what to charge for products and services. Converters typically price based upon a level or index that is created by their costing systems. Many companies compensate their salespeople on a sliding scale based upon these levels and indices. Yet everyone knows that every month there will be significant variances between the assumptions used in creating the costing system and the actual results shown by the company.
First, there will always be a volume variance based upon the planned level of activity at each machine being more or less than what was used in the system design. Secondly, there will be a budget variance due to the actual expenses being different from the budgeted expenses contemplated in designing the system. Thirdly, there will be a performance variance whereby setup times, run speeds, and quality will be different than planned.
Many feel that what is needed here is to update the standards used in the system more frequently and to measure the variances each month as a means to fine-tuning the system. In my opinion, there is no sure-fire way of allocating all of the costs back to all of the orders. In my opinion, an attempt should be made to get the contribution component shown in the system to within a few percentage points of financial statement contribution and move on. Pretty close in this area that can best be described as “fuzzy math” should be more than close enough.
Bank reconciliations, accounts receivable, payable analysis, and things like payroll calculations and tax filings must be tied out to the penny, but much of what transpires in the world of operations is imperfect. Attempting to add a high degree of accuracy to reporting is often fruitless and counterproductive.
The financial professionals and I discussed many ways in which performance measurement systems, financial and operation reporting systems, and costing and profit prediction systems can be enhanced and changed. The discussion was lively and interesting, and I think many of them would like to be the agents of change and improvement. What we need to do now is get owners, general managers, and other key executives to join the discussion. Even though I hate the “bean counter” tag, financial managers get traction on other by giving owners and managers “fast, materially accurate beans,” timely sales, and operational analyses. The quest for high precision in a very imprecise situation will decrease their effectiveness.
Mitch Klingher is a partner at Klingher Nadler LLP. He can be reached at 201-731-3025 or mitch@klinghernadler.com.
