How to Set Up an Accounting Department (#165)
/In this podcast episode, we discuss how to install accounting practices in a company that doesn’t have any policies and procedures. Key points made are noted below.
A lot of us run into this problem. You might be with a start-up company that initially doesn’t have an accounting function at all, or maybe you’re getting into a situation that’s a complete mess. So where do you begin?
Cash Tracking
You always begin with cash. Because if that’s screwed up, the company will fold, and nothing else matters. So you have to understand cash and set up systems around cash. That means scratching together some kind of a cash forecast. Initially, if there’re no supporting systems, or they stink, you’ll just have to cobble something together, to see if there’s enough cash to keep going for the next couple of months. If not, you have other problems. But if the cash situation is OK, the next step is to take a hard look at the problems you had putting together the cash forecast. Maybe the aged receivables report is unreliable, or maybe not all of the payables seem to be recorded in the books. Or maybe you’re not sure about the repayment terms on a company loan. Whatever there is, write it down. This becomes the first part of your checklist of activities.
Calendar of Activities
Next, create a calendar of activities, and mark on it when you’re doing the next cash forecast. Probably in about one week. When you do the next forecast, upgrade it a bit by addressing one of the items on your checklist. And keep doing that. Eventually, probably in three or four months, you’ll have created a pretty acceptable cash forecast. And you did it, because you followed a calendar that forced you to repeat the activity, and a checklist, that forced you to upgrade the activity.
Credit Enhancement
So far, we’re only monitoring cash levels. The next step is to take an active role in improving cash. We do that by addressing credit and billings and collections. Credit goes first.
Credit is like a spigot. If you open the tap and credit pours out, you might have a hard time collecting all the money that customers owe. So the first step is to take a hard look at how credit is being granted.
In a loose accounting organization, they pretty much give credit to everyone. If so, see what the impact is. Does the company have a lot of bad debts? If so, with which customers? And under what circumstances was the bad credit handed out? If you can get the answers to these questions, you’ll probably find that one or two very specific credit rules need to be set up to handle bad debt problems. If so, formalize just those rules. In other words, only formalize the rules that are really needed. Don’t take a bunch of policies and procedures from an accounting book and force them on the department. If you’re just starting out, you don’t have time for all of that bureaucracy. Instead, focus on just what matters to get credit under control. Then write down in your checklist any remaining credit issues that you want to address the next time around, and mark down a date in the calendar to do it – probably in a month or so.
Collections Enhancement
Next up is collections. Review the aged receivables report and see what’s way overdue, and why it’s way overdue. If there aren’t any problems, then guess what? Move on. There are no policies or procedures to mess with. Again, we’re initially setting up systems just to correct existing problems. If there are no problems, don’t mess with it. But if there is a collections problem, figure out a possible change in collection activities, like bringing in the sales staff to help. Then make a note in your calendar to check back in a couple of weeks to see how it worked. If it did work, you might have a new procedure for the collections staff to use. If it didn’t work, no procedure is needed.
Billings Enhancement
Next up is billings. Have someone compare product ship dates to billing dates. If there’s a big differential, the billing process needs to be tightened up. To do that, install a policy that billings have to occur within one day of shipment. Guess what, you now have an official policy. Put it in the accounting manual, and then surprise the billing staff in a couple of days by checking in again. Without a doubt, they won’t be billing on time yet, because they didn’t believe you. This is a good time for a fire and brimstone speech, followed by more follow-ups to see if they’re billing on time. And of course, the follow-up is listed in your calendar.
So you see where this is going. Setting up a properly structured accounting department is not a matter of dumping a pre-written policies and procedures manual on the accounting staff. Instead, install just what’s needed, and then keep following up to make sure the changes stick.
And then if it appears that another change is needed, incrementally create one more policy or procedure, and make sure that that one sticks, too.
Accounts Payable Enhancement
So let’s keep going with our structuring process. A fun one is accounts payable. In a really unstructured department, the staff just accepts all invoices, no matter where they come from, and pays them without a lot of cross checking. Believe it or not, that’s not a bad starting point, if the goal is to keep suppliers happy. And it just might be. Chances are, duplicate payments and fraudulent payments are a pretty small part of the total.
Nonetheless, start working on a single improvement to payables. The obvious one is to have the payables software do an automatic match on invoice numbers, which flags something that’s already been paid. Another one might be to use negative approvals, where the accounting staff is going to pay every invoice unless an approver says no. Whatever the case may be, install just a single improvement change, and lock it down with repeat attention.
Payroll Enhancement
Another area is payroll. The main issue, of course is to make sure that everyone is paid the correct amount and on time. So look at the complaints coming back from employees, pick a good juicy problem, and analyze it to death. For example, if paychecks aren’t reaching an outlying location on time, set up a procedure to send the checks by overnight delivery service. Whatever the improvement may be, establish it, create a procedure, and make sure it’s followed.
Financial Statement Enhancement
And finally, there’s the financial statements. Sure, you can shoot for producing financials in one day, but you’re not going to do it. At least, not for quite a while. In this case, the first target is to produce accurate financial statements. Once you’ve reached that goal, then work on compressing the time line. To do this – again – work on one improvement each month, and get it right before moving to the next one. For example, if the closing entries are perpetually screwed up, create some journal entry templates in the accounting system, and spend a month or two making sure they’re exactly what you want. Then lock down the templates and move on to the next project.
General Concepts
Now, I can’t begin to tell you how to set up an entire accounting department in a seven minute podcast.
And I realize this is an important issue for people who’ve just walked into a mess, and have no idea where to start. But what I’ve tried to do is lay down some general concepts to follow. Which are:
Organize the cash situation first. Then organize the value that accounting adds to cash flow, which is credit and billings and collections. Then work your way through the department, and organize the items most desperately in need of change. And “organization” means a highly tailored approach that installs just the most crucial policies and procedures. And then beat on the accounting staff to make sure that everyone is following the new rules.
Then do a continuing series of passes through the department, to clean up less important items. Now, unfortunately this approach also means that you may end up reacting to crises. So, for example, if a large bill was paid twice, that suddenly becomes your number one issue. That’s fine. If the loss was that big, maybe it should be your number one issue. But after a while, you’ll have set up enough structure in the department that any remaining crises are going to be pretty small.
And that’s it – that’s how I would go about setting up a properly structured accounting department. You’re basically adding layers of policies and procedures, and when there’s no need for any more, stop. That means the department focuses on just the structure it needs, and ignores any extra bureaucracy. If the situation changes, then maybe you’ll incrementally add on a little more structure. But don’t overdo it.