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    Senior Finance Executive ~
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Safeguarding Financial Resources: Issues in HR

As finance & accounting professionals, one of our primary roles is to safeguard the financial resources of the company for which we work.  This is accomplished through the controls we have within finance & accounting processes, and the analysis we do to identify anomalies in financial results.  Safeguarding financial resources also means understanding the potential risks that exist within the company’s operations that would have a financial impact, and mitigating those risks where possible.  It is important for a good financial leader to have a grasp of the entire company’s workings in every department because of this very reason.  Human resources is one area that needs to be on the radar screen when understanding potential risks.  Even in this day and age of automation, salaries & wages still comprise a large expenditure for the majority of businesses.

The U.S. Department of Labor as of late has been taking a more active role in investigating companies with potential violations in employment practices.  The DOL has been increasing the number of investigators on staff to support these efforts.  It is imperative for companies to  ensure they are in compliance with labor laws to avoid hefty fines or lawsuits.  Although there are a multitude of laws surrounding labor practices, I would like to address two areas in particular in today’s post:  classification of employees as exempt or non-exempt and proper timekeeping.

Exempt vs. Non-Exempt Employees

Just to make sure we’re on the same page, because I know people who get this mixed up, exempt employees are not paid overtime.  The determination of exempt vs. non-exempt lies in how an employee performs their job.  It is NOT dependent on their title so don’t think every person you call a “manager” is automatically an exempt employee.  This is why there should be a written job description for every position and modified job descriptions for each individual in a particular position if there are significant differences from the base position.  Exempt employees usually have autonomy in determining how their job is done and work whatever hours are necessary to accomplish the deliverables of their position.  These are usually employees that are paid a salary and have managerial, administrative or supervisory roles, or are professionals.  However, sometimes there can be a gray area in classifying employees.  Whenever there is a doubt about which way a position should be classified, seek the advice of an employment law attorney.  It may cost a little but it will help you decide what side of the line to walk on and determine what risks you are taking.

Timekeeping

Disputes over time paid, especially if an employee is contesting their exempt status, can be a huge headache for a business.  This is why having good timekeeping systems and procedures are essential.  When these cases are brought to the DOL or the courts, the assumption is the employee is right.  After all, who would know better how many hours they worked than the employee themselves.  These are usually civil cases so there is no “presumption of innocence” — it is based upon the preponderance of evidence.  This simply means that if the evidence was stacked up side-by-side, what side does it favor?  Any ambiguity will usually favor the weaker party, in this case the employee, because it is accepted that the company had greater control to write and implement the terms of employment.  Because of this, a lax timekeeping system will sink you every time.  When considering your timekeeping, there are so many situations you need to consider like “buddy punching” and how missed punches are handled.  Another consideration is cost — not every business will be able to afford the gold standard of a biometric system.  The important thing is to have a system and to make it the best system it can be to mitigate risk.

Now some of you might be saying these are issues for the Human Resources department to handle and I agree the legwork to ensure these issues are addressed lies with them.  However, if the company’s practices are found to violate legislation, and it faces large fines and payouts because of it, I can guarantee senior management will call both HR and Finance onto the carpet for an explanation.  After all, we’re supposed to be safeguarding the financial resources of the company.  And whether we like it or not, if we turn a blind eye to what is happening around us and stay strictly focused on “getting the books right” and reporting the numbers, we aren’t doing the job we were hired to do.  If you do nothing else, at least ask the questions to make sure the issues are being looked at and addressed.

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Financial Reports: Useful or Useless?

Finance & accounting departments are ultimately about reporting.  If you are a public company, there is the required reporting to the SEC and the shareholders.  And regardless of whether you are public or private, there are many other external reports that allow the business to meet its obligations to external stakeholders like banks.  But the focus of this post is on the internal reporting within every company.  This is the reporting that is hopefully adding value and helping to provide direction as the business drives towards its goals and objectives.  Unfortunately, all reports are not created equal and many fall far short of the value they were intended to create.

The problem with reports that don’t live up to their expectations is they are time wasters on two fronts — for finance & accounting who prepare the reports and for everyone else trying to decipher what information in the report is important (if any).  When this happens, people begin to question the value of not just the reports but of the finance & accounting group as a whole.  As financial professionals, we are expected to provide information that is valuable to decision-making; clear, concise & accurate in its presentation; and timely to the needs of the business.

Probably the biggest pain is the reports that have been around since the dawn of time.  They are usually the biggest drain on resources because of the way they are structured and where the information comes from.  These reports probably bear no resemblance to where the business is today and focuses on things that are no longer goals of the company.  But if you ask everyone if the report can be stopped, they drag out their pitchforks and want to lynch you for even suggesting it.  How can they possibly continue when the report has been a part of their business life for so long?  I remember one of my employees coming to me about a report like this and asked what they should do.  I looked at the report and, in my opinion, it really wasn’t a valuable report.  My advice — don’t do it for two weeks and see if anyone squawks.  Surprisingly (or not), not a single person noticed the report was missing!  The takeaway from this is every report should be reviewed with a critical eye on a regular basis to determine if it still adds value in the context of the business’ goals and objectives.  If it doesn’t, show it the door.

Equally important is reviewing reports to see if gains in efficiency can be made in preparing them.  Look for reports that contain the same information and see if they can be consolidated.  Determine if detail is really necessary or if the report users just want the summary.  Also, see how often a report is really needed.  If the report users only look at the information once a month before a scheduled meeting, why are you busting a gut getting it out weekly?  Ensuring that reporting is a value-added exercise requires good communications between finance and the rest of the business.  Understanding their needs and balancing it with what we can do given the resources we have can be a challenge.  But if the end result is better reporting leading to better decision-making, we’ve done our job well.

(De)Centralization

Someone once told me a story about a man who only kept two files in his desk — one on how to centralize the company and one on how to decentralize it.  It turns out every time there was a change in leadership, there would be a corresponding shift in the way the company was structured.  Why all the flip flopping?  Is one structure better than the other?  Or is this just a case of someone putting a stake in the ground to put their own signature on the company?

Quite honestly, there is no clear cut answer about what is best for a business.  Whether to centralize or decentralize needs to be evaluated on a case-by-case basis by considering the goals of the company and how interactions, both internally and externally, will get the business to those goals.  What happens more often than not is a hybrid situation.  Sales is decentralized but marketing is centralized.  HR is centralized but operations is decentralized.  However, there are two areas of a company where I think at least some centralization needs to be strongly considered — finance & accounting and IT.

Many of the arguments for centralizing these two functions are similar:

  • There are economies of scale to be gained from managing bulk transactions or company-wide systems with a dedicated group of employees.
  • Consistency and best practices can be filtered throughout the organization.
  • Maintaining controls and ensuring prescribed procedures are followed is easier.

In today’s economy, and with the multitude of legislative requirements especially surrounding the finance & accounting field like SARBOX, these thoughts should be at the top of the list when considering the centralization question.  Centralization of functional areas like A/P, A/R, cash management and payroll is important to consider since these are prime gateways to fraud and embezzlement.  And the recent stories coming out of Koss, Avaya and Bank of America should certainly make us sit up and take notice.  This is not to say centralization would completely protect a company but it’s easier to ensure the controls to prevent it are followed.

Even though it may seem I’m a huge proponent of centralization for finance & accounting, you will notice I said some centralization needs to be strongly considered.  One of the downfalls of having all of finance & accounting run from a central perspective is often the creation of an “us vs. them” mentality.  Finance is viewed as being prohibitive, not working with the business and being more concerned with following the rules regardless of the impact on operations.

There is a way to avoid this — ensure there is good communication between finance and the business units.  One of the best ways to accomplish this is to have a dedicated accountant or analyst working with each group that is actually part of their team.  The accountant can act as a champion for the unit to see their needs are addressed but are still balanced with the requirements from the center.  They also gain a better understanding of the unit and can provide the insight needed when doing variance analysis or business evaluations as part of the reporting process.  This is how I structured my department and each of my accountants became a valued team member whose opinion was sought in day-to-day decision making.

Ultimately, each company must weigh their requirements and their culture to structure the finance & accounting function so it provides the support and value needed by the business.  Just remember, it doesn’t have to be an all-or-nothing proposition when it comes to centralization or decentralization.

Who’s the Best? Benchmarking to Keep Ahead

“Competition is the keen cutting edge of business, always shaving away at costs” ~ Henry Ford

Being better than the next guy is a driving force for many businesses especially in highly competitive industries.  Everyone wants to be at the top of the heap and set the standard for excellence.  And for those who aren’t the best, they want to know how the best got there and how they can improve to surpass the current leader.  This is the essence of benchmarking.  Benchmarking is the act of comparing yourself against others to determine where you stand relative to the competition.  It may seem like an easy thing to accomplish on the surface but there are a few issues that need to be considered.

First, you need to determine who is your competition.  For industries with a few big players this is not difficult but when you are in an industry with lots of small players, sorting out the winners against which to compare yourself can be challenging.  You might want to consider focusing on companies that match your demographic profile like geographic reach or number of employees to make the comparisons of more value.  You can also benchmark against companies that might be national if this is the eventual strategic path your business wants to take.

Second, you need to determine what measures you want to use to compare yourself to the competition.  Do you want to measure market share, employee productivity (like sales dollars per employee), product quality, or other measures?  The selection of measures will be dependent upon your industry and what your motivation is behind benchmarking.

Third, you need to figure out how to get the information you want to complete your benchmarking study.  This may be the most daunting task of all.  Again, when dealing with public companies much information is available because of the reporting requirements they have to their shareholders and the public.  But getting information on private companies and industries can require more creativity and a strong penchant for research.  When seeking out information about other companies or industries, try some of these sources:

  • Industry associations & groups
  • Internet searches
  • Libraries (public library or universities & colleges especially ones that have a business school)
  • Dun & Bradstreet
  • Hoover’s

Most of the major accounting and business intelligence applications provide a benchmarking module or service.  There are also two online products that will provide benchmarking services that have been mentioned in internet searches on the subject.  Although I haven’t used either, in looking at the information about their products, it might be worthwhile to examine them to determine if they could bring value to your company:

  • webKPI (www.webkpi.com)
  • ProfitCents (www.profitcents.com)

You can also try to create a mutually advantageous relationship with your competitors to share information.  This may seem like a bit of a pipe dream but if the information being shared is not proprietary, it might behoove everyone to engage in friendly competition.  Competition spurs on creativity, innovation, and a desire to win.  And depending on the industry, this can serve both businesses and customers well.

New Year, New Budget … but is it the right tool?

There is always something exciting about starting a new year.  It’s like having a clean slate so to speak.  Oh, it doesn’t mean that what has happened to you in the past disappears but it’s a point from which to start measuring new challenges and new initiatives.  This is true whether you are an individual or a business.  Individuals use resolutions to set up these challenges and initiatives, many of which will fall by the wayside before the end of January.  For a business, it often means the beginning of a new budget and that too can fall by the wayside quickly.

A budget can be a dangerous business tool when its weaknesses are not well understood and too much faith is put in it.  The budget that was created last year, after many months of work, represents a best guess about where the business will be this year given the set of assumptions made at the time the budget was created.  But we all know that the assumptions can become skewed or change as the economy ebbs and flows.  And as a result, measurement against a static budget isn’t always going to lead you in the right direction.  So what do you do to avoid the budget becoming a wasted effort and the nemesis of everyone in your company?

I recently read “Beyond Budgeting”, a book addressing the weaknesses of the traditional budgeting process and how to combat it.  The authors promoted the idea that the budget can be done away with and gave a number of case studies attesting to the success of this method.  However, the budgeting process is so deeply ingrained in the American business psyche that only a handful of companies will ever be able to achieve this nirvana.  Instead, there are a number of tools that I have worked with in the past that can help make the budget more valuable and supplement it to drive growth.

  • Flex budgeting
  • Balanced scorecard
  • Benchmarking
  • Incentivizing the right way

I will be discussing each of these tools in posts throughout the coming week starting with flex budgeting.

Wishing everyone a Happy and Prosperous New Year!

Welcome to The Finance Compass

I’ve been thinking about starting a blog to discuss finance and accounting issues and decided what a better time to start than 2010!  The past year has been fraught with challenges for everyone and now more than ever it is so important to share ideas and get an open dialogue going on what we need to do to make business better.

Although this blog is aimed at finance and accounting, my intent is to make it not overly technical so the content can be valuable to anyone in business regardless of position.  I also realize many of my accounting and finance counterparts will be familiar with some of the concepts and materials I present here.  Often times though, we get caught up in the way we’ve always done things and we forget about things that can make our lives easier or can bring improvements to our business.  Hopefully the posts in this blog will jog your memories and prompt you to go back to explore the things you know.

Starting this week, I will be posting a series about budgeting and related measurement tools.  I know that for many companies the budgeting process is months away but I believe it is vital to start thinking now about how to make it better.  We all know once the budgeting cycle starts, it is too crazy to take a step back and ensure we are headed in the right direction, and that the fruits of our labor will actually mean something.

I welcome all of you to The Finance Compass and trust you will find it informative, thought-provoking and a “must read”!