Swimming With Sharks 1

As a small manufacturer, getting your first order from a giant company like Walmart or Sears can be a dream come true.  But that dream can turn into a nightmare if you don’t have the right systems in place.

I worked with a company that landed a contract with an international department store chain.  One month’s order from them involved more of my client’s product than they had sold in the whole previous year.  It was a cause for celebration and the sales team threw a party.

Then the realities of all the logistical requirements hit home.  All of the skids had to include an RFID tag (radio frequency identification) to identify the contents of the skid to the department store’s computer system.  The truck had to show up at the receiving dock at exactly the right time.  All of the shipping documentation had to be sent electronically (by EDI – Electronic Data Interchange).  If anything went wrong, the department store would reduce its payment to my client by a pre-set penalty.

That may not sound like much.  Just a few extra steps with each shipment, right?  Wrong.  Another part of the agreement had the six different ways the company forecasts demand and replenishes stock.  They want to keep the minimum quantity on hand and avoid out of stock situations, meaning that suppliers have to be on their toes and respond immediately to new orders.

If my client had had a full featured ERP (Enterprise Resource Planning) system like Oracle or SAP, all of this would have been routine, but they were just a small operation.  So we modified Microsoft Dynamics GP to create special reports that could be downloaded from the accounting system and made a big list in Excel for the staff to follow.  But it would have been so much better, if the client could have had a workflow system that would have sent email reminders to all of the staff about what steps they had to follow for each shipment.

So, let’s stand back a little and look at the best strategy for your systems if you are a medium sized company swimming with sharks.  You have your toe in the door, but have no way of knowing whether this is a one-shot deal or the start of something big.  In the long run, you would like to be able to ramp up your sales, production and systems so that you move up, but in the short run, that strategy is time consuming and expensive.  A good starting point is to upgrade one piece at a time, making sure that anything new you add will work to meet the current demand AND grow with you as you upgrade.  In this case, a work flow system would keep the staff on top of the vendor requirements, as well as supporting the company’s operations regardless of what the future holds.

Reposted with the kind permission of iDatix:  http://www.idatix.com/insider-perspective-swimming-with-sharks-what-to-do-when-dealing-with-large-retailers/

Changing Accounting Standards

What are some of the biggest headaches in accounting?  I’m sure you have your favorites, but let me tell you about Doug.  I called him last week to see if he wanted to go for a drink, but he was still in the office late on a Friday evening.  It turns out his company adopted some of the new International Financial Reporting Standards, so he has to go back and restate the numbers, right back to his opening balance sheet at the end of 2009, and then carry the results forward using the new rules.

“As if that wasn’t enough,” he said.  “We’ve got a bunch of contracts that go back ten years or more.  The auditors now want proof of existence.  They never asked for that before and they don’t accept the fact that we get payments each month.  They want to see the actual paper.  I mean, I know we have them.  They’re piled up on skids at the back of the plant.  But it’s really dirty back there and it’s going to take days to find all the ones the auditors want to see.”

When rules change, they never get simpler.  So often you have to go back to the original transaction and interpret it in light of the new rules.  And it’s not like you can plan for the change.  I can’t tell you the number of times I have wished I had had the original documentation about a transaction so I could see who signed it and ask them what they were thinking at the time.  Or, better yet, if I could have the emails or memos that led up to the deal, so I could understand the intentions of the parties.

Wouldn’t it be nice if you could click a button and see the documentation?  Or what if charities and universities could track the trust documents and bequests in their endowments.  I know a church that wanted to consolidate its endowments because many of them were tiny.  The $5,000 that was a significant gift in 1960 was now almost more trouble than it was worth.  It would have been helpful to have all the original documentation, so that they could approach the surviving families and/or the public trustee.

Honestly, I don’t know which is Doug’s biggest headache, the changing rules or auditors’ demands, but I’ll let you know after we finally go for that drink.  What is your biggest accounting headache?  I’d be happy to feature some in future blogs.

Reposted with the kind permission of iDatix:  http://www.idatix.com/insider-perspective-changing-accounting-standards/

Exploding Conventional Wisdom

The accountant usually has a feel for what's really going on. My grandfather's accountant, Lloyd Smith, had a client in the construction business. While doing the financial statements, Lloyd realized that some of the projects were losing money. The owner brushed him off. He said he knew all his staff and suppliers. He knew what went into each project. There was no way he could lose money on any of them. Lloyd set out to determine the truth. All of the purchases for a project were stored in an envelope and the labour charges were written on the outside. Lloyd pored over the purchase journal and payroll records to find out exactly what a sample of projects was costing. Sure enough, he was able to prove that some of the projects were indeed losing money. That got the owner's attention and changes were immediately put into place.

That's what I call Business Intelligence. The purpose of BI is to support better business decision making. One of its best uses is to build a case to explode conventional wisdom, those tired explanations (excuses?) for why things are the way they are.

The paper in my file had been photocopied and carried forward so many years that it was almost illegible. It explained why the fuel oil inventory at my client showed as negative. Apparently, the oil was taken out of inventory faster than the purchase records could catch up with it. I used a report writer to look at the ins and outs of fuel oil. The conventional wisdom had to be wrong. January 2nd at the northern Ontario mine site was cold and snowy as the inventory supervisor and I climbed to the top of the storage tank to lower the knotted rope and see just how much oil was in the tank. I'm sure he was swearing at auditors in general and me in particular, but outwardly the man was friendly. The result, however, was significant. The difference between my computer report and what we found in the tank turned out to have been caused by a computer field that was too small to hold the large quantity of oil (measured in liters). It was dropping two decimal places from the calculations. As a result, immediate changes were made to the computer system.

In your company, are you hearing the same explanations over and over as to why sales are below budget? Does something just seem wonky in the direct costs or manufacturing overhead? This is where all that money you spent on technology and training can really pay off. If your spider senses are tingling as you look at the financial statements, go with your gut and delve into the data.

Start with the conventional wisdom, e.g. "sales are down because of the high Canadian dollar". Ask yourself how you could prove that statement true or false. For example, you could determine the actual effect of the change in exchange rates and see if it's significant. You could drill down on sales by product / salesperson / sales territory to see if the effect is across the board or only with a specific item / salesperson / geographic location. Follow your experience, but use the technology to support your results. People are not going to change just because you say so. They will need documented proof. Conventional wisdom is difficult to refute.

When you have your answer, spend a little more time with the technology to make the resulting report easy to read, then show it to the operational people responsible. Better decision making may just be the result.