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What I learned about finance

Inside Business

Posted: September 23, 2008 8:21 p.m.
Updated: November 25, 2008 5:00 a.m.

One of the best educational experiences during my tenure in corporate America was the two-and-a-half years I spent crunching numbers for one of the largest consumer products companies in the country.

I learned nine important lessons that I still abide by today.

At that time in this particular company, the accounting department was a separate entity, responsible for accounts receivable (invoicing and collections) and accounts payable (paying all invoices in a timely manner).

At that time, accounting gathered the data and finance formatted in financial statements and reported to ownership in a monthly presentation.

The first thing I learned is that an owner cannot make good business decisions if the information isn’t accurate. In addition to having an internal auditor who constantly checked the validity of information accounting was collecting, outside auditors were brought in every year to challenge the system for integrity.

The second lesson is that an owner must have information in a timely manner. My first year in finance was a nightmare. Accounting had more excuses than journal entries for not getting things done on time.

The monthly meeting with the owner was postponed so often that by the time finance presented the information was outdated.

With a new controller, accounting provided information within five business days of the month’s end. I learned another lesson when I found out the reason things had been dragged out.

Accounting didn’t know what they were going to do with all that “extra time.” (With a new controller on board they found plenty of things to do.) The third lesson was that “work expands to fill the time available.”

The fourth lesson learned is that numbers by themselves meant nothing unless compared to something. When preparing the financials, we always included the results versus the previous year and the current year plan (both to-date and to year end).

This provided perspective to see how each operating division was performing.

Fifth, I learned that looking at the financial numbers from a 10,000-foot perspective wasn’t enough. While an owner needs to see the big picture (are we making money and where is it coming from?) the success of a business is truly in the details. But details tend to bore many owners.

Finance gathered data and analyzed for the owner the profitability of every sales person, customer, label, region, product, category, promotional offer and market segment.

This meant pulling accounting data and creating information so the owner could make better decisions. We didn’t overwhelm the owner; once a month we’d give him a short report that provide some perspective that we felt was needed or had been asked for.

During all of this, I learned a sixth lesson: Money leaks from organizations in ways no one thinks about.

It wasn’t just inflated expense reports, excessive telephone use or using the copy machine for personal use; we uncovered vendors sending invoices and no one inside the company checking to see if the work had been done — one department was signing off on $500,000 worth of work every year without verification. Some customers had invoice discounts that had reduced their prices for years, long after the original competitive need had gone away.

While officially there was a purchase order system in place, that only applied to those areas tied to manufacturing. All other departments operated with ad hoc systems.

There were no checks and balances to speak of. If an invoice was submitted, accounting cut a check and the payment went out. It seemed that anyone was authorized to spend money and, well, they did.

The seventh lesson learned was that to be an effective owner, ample time needs to be spent reviewing the financials.

The condition of a company is not just in a single number. It is in a series of numbers, not necessarily on a single piece of paper.

To understand how an organization is performing, the owner needs time to be educated on what is being presented, grasp the implications of trends and create strategies and actions to change to achieve the goals.

This cannot happen in a five minute glance of the financial statements. In this particular company, the owner spent one full day per month in a complete financial review, with all senior managers present. Finance presented the results.

There was never a question of the validity of the numbers because they were correct and current. Each senior manager was held responsible for the financial results of their division and these group meetings were not always pleasant, especially if you were running a division not making the numbers.

The eighth lesson was that the owner and senior managers left those meetings with a renewed sense of urgency and focus. That motivation and energy was immediately transferred to everyone that could impact the numbers. In my tenure, the company doubled in size, all the while keeping the employee count at almost the same number.

The revenue per employee almost doubled in my tenure, with no growth in overhead, something that not many organizations can boast of.

That was the final lesson: Every organization and every employee is capable of much more than we believe.

Kenneth W. Keller is president of Renaissance Executive Forums in Valencia. His column reflects his own view and not necessarily that of The Signal.


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