What is Management’s Attitude About Internal Control and Why Does It Matter?

 

By Bob Swetz
Controller Consultant | Tier One Services, LLC
As external auditors, accountants, and bookkeepers who are concerned about our clients, we need to be aware of management’s attitude towards internal controls.
So, what does that even mean, “Management’s Attitude?”
Let’s look at an analogy that many of us can relate to. Suppose a friend suggests that you should be more physically fit. He provides you with a detailed and customized workout routine that you are to perform 5 days a week. It’s a great plan and if followed will help you reach the goal of being fit.
Notice how I said, “the goal” and not “your goal.” You see, the problem is you aren’t too concerned about being physically fit, it’s just not something you care about right now and certainly not a priority for you. Given this set of circumstances, the chances of you doing the workout at all, let alone 5 days a week are slim, therefore the probability of you attaining the goal of physical fitness is also minute.
Why does management’s attitude about internal control matter?
Management’s attitude about internal control matters for a few reasons:
1.      Management’s attitude will most likely trickle down to the staff
2.      If management doesn’t care, the staff probably won’t care either
3.      Even if the staff does care, a poor attitude at the management level will tend to override the good controls that are in place (more on this is a future article)
4.      The best plan will fail if it is not properly implemented and monitored
Management having a poor attitude about internal controls doesn’t necessarily mean that management does not have integrity. It could be that they have too much on their plate to focus on internal control. As trusted business advisors, we may be able to fill a gap that management didn’t even know existed. It’s something to think about as we perform our day to day duties for our clients.
If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

What Level of Internal Controls Does Your Organization Need If You Don’t Have an Audit?

By Bob Swetz
Controller Consultant | Tier One Services, LLC

I get the feeling that most organizations think that maintaining proper internal controls and accounting procedures only serve to please the auditors. That attitude couldn’t be further from the truth.
Proper internal controls and accounting procedures are necessary in any organization to protect the organization, its assets, its leaders and employees.

According to the PCAOB AU Section 319…
Internal control is a process—effected by an entity’s board of directors, management, and other personnel—designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (a) reliability of financial reporting, (b) effectiveness and efficiency of operations, and (c) compliance with applicable laws and regulations.

Note that nothing in that definition states that controls are for the benefit of the auditor.

A Quick Example…

Proper internal controls over the cash disbursements function are intended to prevent fraudulent payments. If the controls and procedures are followed properly they will protect the organization from theft and the employee from being accused of theft. It works both ways.

A Final Thought…

Adequate internal controls are important for every organization, not just the ones that have someone looking over their shoulder.

If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

Should Your Organization Be Using Purchase Orders?

By Bob Swetz
Controller Consultant | Tier One Services, LLC

From my experience as an auditor, I have found that purchase orders and their purpose are misunderstood by many organizations.

There are 2 common reasons organizations might want to use purchase orders

1. To obtain proper authorization for purchases

2. To control and track inventory in the organization’s accounting system

If your organization is using purchase orders for the first reason, for authorization, then I recommend a careful review of the purchasing process to ensure that their use is meeting your organization’s objectives. In short, purchase orders should be prepared by the requesting employee and reviewed and signed by at least 1 member of upper management, generally a department supervisor, before the purchase is made. Once a properly authorized purchase order is obtained it can be delivered to the vendor to initiate the actual purchase.

If purchase orders intended to meet the authorization objective are processed after-the-fact, then the objective has not been met.

If your organization is using purchase orders for the second reason, to control and track inventory only, then perhaps the authorization steps are not necessary. If that is the case you should keep a couple things in mind. First, there must be other authorization procedures in place in relation to the purchasing and cash disbursements function. Second, purchase orders should still be completed prior to making the actual purchase. When goods are physically received the items should be marked received in your accounting system and matched with the invoice.

If purchase orders intended to meet the inventory control objective are processed after-the-fact, then the objective has not been met.

The bottom line is that purchase orders can be an effective part of your organization’s purchasing and cash disbursements function when used properly and when prepared in advance of the actual purchase. Make sure to determine your objectives first and the rest should follow suit.

If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

How Does Receiving Grants Affect Internal Control?

By Bob Swetz

Controller Consultant | Tier One Services, LLC

Using proper internal accounting controls is important for any type of organization. However nonprofit and governmental entities that receive grant funding typically have at least one additional layer of controls to consider. These controls can be mandated at the Grantor, State or Federal level.

Grantor Level Requirements

If your organization does not fall under federal or state guidelines you may still be required to have specific procedures and controls in place that are stipulated by the grantor. It is extremely important to carefully review the grant documents to make sure your procedures are in compliance with the grant.

State Level Requirements

Some grants are funded with state money but do not fall under federal guidelines. In this case, it is important to understand the overall guidelines of the funding state department to ensure that your controls and procedures meet any specific requirements. As discussed above, you should also carefully review your grant documents to ensure compliance.

Federal Level Requirements

Organizations receiving more than $500,000 in federal funds are held to a completely different standard. If your organization falls into this category, you are not only required to have the proper internal accounting controls in place for audit purposes, but you must have controls in place to ensure compliance with federal laws and regulations related to the grant. Auditors will use the OMB Compliance Supplement for the appropriate CFDA# related to your federal grant, so it is important to be current with applicable laws and regulations.

At the end of the day, your organization needs to have good accounting controls in place that work for you. Just don’t forget that when you receive grants, others are watching.

If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

Q&A: Secure, Paperless Nonprofit Accounting

[1] When you have paper receipts do you scan them?
Hell no. They snap a picture of them with an app like Entryless or Expensify, where they get automatically classified and synced with the accounting system.

[2] How do you have staff code and authorize expenditures and keep that info with the digital receipt?
Staff don’t need to classify transactions. That’s the job of the Finance team. What the Finance team needs is a description of the expenditure and the grant it was for, if that applies.

Staff don’t authorize expenditures, either. That’s up to the ED, who sets policy and then reviews expenditures in the accounting system or an app. Some apps (like Bill.com) and some accounting systems (like Xero) have an Authorize button for bills.

[3] How do you store all these digital bits?
In the app and/or attached to the transaction itself in the accounting system.

[4] How do you pass on the receipt, coding, and authorization to the person signing checks?
In the app & accounting system. In Xero, for example, there is an in-program authorization button for payables.

[5] If there’s fancy software that does this all, what is it and how much does it cost?
It’s not fancy software. It’s cheap and zillions of people are using it. Times have changed. Thank goodness.
Check out Entryless ($22.49/mo), Xero ($30/mo for unlimited users), Bill.com ($19.95/mo).

[6] How much server space does 7 years of “paperwork” eat up?
Servers have evolved. First of all, in most cases you’re not using your own server but that of your cloud-based app, and (a) you don’t care how much space these documents take up, and (b) they’ve got such economies of scale that the space is dirt cheap. See pricing above.

But secondly, server space is cheaper now than it has ever been. So if you run out of space, you buy more. It’s not a big deal. Certainly cheaper than renting a bigger building to store more paper files, and because no one actually does that since that idea is ridiculous, I’ll mention that it’s still cheaper than renting a storage unit for your older paper files, which plenty of people do. And it’s less risky. Paper file can be so easily damaged. Flooding, fire, mold…stuff happens.

Two final points on questions that you didn’t ask:
[7] The risks are higher when everything is on paper:
[a] The savvy cloud-based providers have redundant servers in geographic locations with different natural disaster profiles (“we here at San Andreas Cloud Services store all of your data securely in a nearby warehouse!”)
[b] Paper is easily stolen, lost, or otherwise messed with. When everything is electronic, all you have to do is revoke access when an employee leaves, for example.
[c] You’re stuck with local auditors, whether or not they’re any good, whether or not they charge competitively, plus you have to pay more for all of the shlepping they have to do for the field work. Plus the audit takes longer. Which the Board really loves. Whee! Last year for a new client we cut the timeline from “year-end” to “board presentation of the financials” from 8 months to 4 months. So having everything available paperlessly gives you more leverage to shop around, and if you live in a major metropolitan area you can get an auditor in a lower COL area and pay less but without sacrificing the level of service.

[8] And lastly – this applies only to some organizations, but in those cases, the costs are outweighed by the revenues generated in the physical space that is now freed up. What does the org get to put there, in the entire office drowning in file cabinets? Another fundraising professional, perhaps?

Is it worth it to track inventory quantities, not just dollars?

 

How much money do you stand ready to make & keep from this data?
Uses of quantity-specific inventory information include:
* prevention & detection of theft and loss
* guard against being overcharged by the supplier
* highest ROI on giving of samples
* shaping of messaging & promotion strategy to focus on highest-margin products, not just highest or lowest sale price
* cash flow management from clarity on reorder points so disbursements aren’t accelerated, or on the other end of the spectrum, she isn’t left without product when a customer needs it
* prevention of losses when she has too much of a non-selling or slow-moving product and has to let it go at a fire sale
* once her business is large enough such that she has to file on the accrual basis, you can help her to make sure she’s not paying too much in income taxes (or too little and then pay extra for it later with money and time)
* assist in setting sales targets & plans for achieving those targets
Track.
Profit.
Repeat.

Which Accounting Program Should I Choose for my New Business?

 

Congratulations on your new and exciting business!
The right accounting program for you depends on what you need now and what you want later.
The three most popular ones for startups are:
QuickBooks Desktop
QuickBooks Online
Xero
In summary, if you are going to start small and grow into something quite large, go with Xero.
If you want to keep costs down in the long term and are accepting paper checks from customers, use QuickBooks Desktop as long as you can run Windows.
If you are accepting paper checks, aren’t going to grow to a 7-figure company, really need a mobile app, and don’t mind the risk of not being able to access your file when you want to, take a risk with QuickBooks Online.
~~~PROS AND CONS~~~
QuickBooks Desktop:
PRO: You only have to buy it once
PRO: Can give you detailed business intelligence on customer trends, service trends for the types of flights – this information can help you price for maximum profitability
PRO: Is the fastest of the 3 programs
PRO: If you will be accepting checks, this has a clear way of handling that
CON: If you need more than one user in the file at the same time, it can get pricey, depending on the situation
CON: Only accessible on a computer, not mobile
QuickBooks Online:
PRO: Syncs with more 3rd party apps (project management, CRM, time tracking, invoicing & payment for example)
PRO: If you will be accepting checks, this has a clear way of handling that
PRO: There’s an app which I hear is “okay.”
CON: Frequent outages
CON: The GUI slows down the whole process because somebody came up with the bright idea that all of the data entry screens should slide up and down. I hate having my time wasted.
CON: Intuit, the company that makes QuickBooks, is pushing everybody toward QuickBooks Online, but for years it has been a problematic product, and now they’re running around fixing bugs and trying to make it better.
Xero:
PRO: Syncs with the most 3rd party apps (project management, CRM, time tracking, invoicing & payment, analysis, forecasting for example)
PRO: In an all-digital environment, it saves you the most amount of time in regular bookkeeping. It pretty much handles everything automatically.
PRO: Has 2 tracking categories in comparison to 1 in QuickBooks, so if you’re going to build a large business with different locations and lines of service, it’s all clear and trackable so you can see things clearly and manage things well.
PRO: There is an **amazing** app
PRO: Once the business grows and you have people helping you, you can approve bills in the system in order to keep track of your money
PRO: They are the up-and-coming cloud-based accounting app taking the world by storm. No bugs. No outages. And getting better all the time.
CON: Doesn’t handle batches of customer paper checks very well.

What Should I Expect From My QuickBooks Trainer?

Start by sharing your business strategy and business model so your trainer can activate features that you’ll need for external and internal reporting, such as:
* bank accounts, including PayPal
* receivables
* jobs vs. customers
* customer types
* inventory features
* item specifications
* item groups
* price levels
* credit card accounts
* payables
* sales tax
* class tracking
* 1099 setup
Then learn how to pull meaningful information from your QuickBooks file and how to interpret that information and make money with that information. If your company is new, have the trainer use a sample file from your own industry to teach you. Examples are: Financial statements, aging reports, job profitability reports, Profit & Loss by business segment or location.
Next: Back-fill into the data entry that’s required to produce those reports. Sales cycle, purchasing cycle, how to do an inventory count & inventory adjustment if you have inventory. Your training should include bank feeds, information about the best 3rd party apps (if any) for you, and the massive time-saving merits of attaching files to transactions and list items.
Next learn how to check your own data with error trapping techniques. For example, if you’re using class tracking, then the Profit & Loss Unclassified report should always be empty. Undeposited Funds should never be stale; the bank reconciliation detail will show transactions that have been outstanding for too long. Stay on top of this and you’ll avoid an irate vendor who hasn’t gotten paid because the check that you wrote is sitting on someone’s desk. You’ll also avoid making a decision based on incorrect financial statements.
To put a bow on the pre-structured piece, learn best practices in backing up the file, data security.
Don’t sign on to a training without a final phase that includes trainer availability for questions that will arise as you actually use the file. You can discuss with your trainer if you want anytime availability for questions as they arise vs. weekly sessions to get the answers, and you’ll document your questions in a list as they come up.

Eight Ways to Increase Your Profits

Increasing your profits might sound like it’s an unattainable dream just out of your reach. But there are a finite number of ways that profits can be increased. Once you understand what they are, you’ll have clarity on how to best reach your goals.

There are two primary ways to increase profits:

  • Raise revenue
  • Lower expenses

That’s not particularly enlightening or instructional, is it? Let’s look at the four ways you can increase revenues and the four ways you can reduce expenses to get clearer on what actions we can take.

Four Ways to Increase Revenue

1. Raise prices

The easiest way to raise revenue is to simply raise prices. However, this is not foolproof and assumes you’ll be able to maintain the volume of sales you’ve achieved in the past.

This method is also limited by market demand, what your customers are willing to pay.

2. Add new customers

Adding new customers is what most entrepreneurs think about when raising revenue. Increasing your marketing or adding new marketing methods is typically the way to add new customers.

Another related option is to work hard to keep the customers you already have. You can also potentially contact the customers you lost and ask them to come back.

3. Introduce new products or services

For some companies, your products and services are changing every year. For others, not so much. To increase revenue, consider adding new products or services that will bring in an additional revenue stream that you didn’t have before.

Even if your products are changing every year, you can consider adding something completely different that your customer base would love.  For example, a hair salon could add a nail desk, a clothing store could add handbags or shoes, a grocery store could add a coffee bar, a restaurant could add catering, a landscaper could add hardscaping, and so on.

4. Acquisition

The final way a business can increase revenue is to acquire another business in a merger or acquisition.

Four Ways to Reduce Expenses

1. Negotiate for a better deal with vendors

If you’ve been working with a vendor for a while, you may be able to re-negotiate your contract with them. This is especially common with telecom companies. Call you phone provider and ask them for the latest deal. They always favor new customers over long term customers, but they don’t want to lose customers either. Just calling them usually yields a better price than what you are paying now.

2. Change vendors

If a vendor has gotten too expensive, it might be time to look for a new vendor. Health care insurance seems to be in this category. Often, changing providers will lower your costs.

3. Cut headcount

If there is not enough work to support your employees or not enough cash flow to pay them, then it might be time for a layoff or restructuring. You might also consider outsourcing a function that you previously did in-house.

4. Cut the expense or reduce services

It might be your business no longer needs to spend money on an expense. Perhaps this expense has been automated. In this case, it’s an easy decision to cut the expense out entirely.

Those are the eight ways to increase profits. Which one makes the most sense in your business? Create a plan around these eight ideas to boost your profit in 2017, and let us know if we can help.

Is There Really a 4-Hour Workweek?

Tim Ferriss made the 4-hour workweek a popular concept in his 2007 book.  But is there such a thing, and more importantly, can business owners like you and me cash in on it?  As the last of the Baby Boomers approach retirement, the topic of working less while making the same or more income is popular.

Here are five ideas to help you work fewer hours while making the same or more income.

Active vs. Automatic Revenue

Some business models allow you to generate automatic revenue.  Automatic revenue is revenue you can earn and leverage over time by doing something only once and not over and over again.  Active revenue is earned while doing something over and over again.  Showing up for a teaching job with a live audience is active revenue while producing and selling video recordings of the same teaching is automatic revenue.

A goal of a 4-hour workweek concept is to increase automatic revenue while reducing active revenue.  You may have to think out of the box to do this in your industry, but the payoff can be huge.

Delegation and Outsourcing

One traditional way to move to a 4-hour workweek is to have others do the work.  Hiring staff frees up your time and allows your business to become scalable.  When it runs without you, it’s more salable too.

Time Batching

If you have a lot of distractions in your day, you can easily double your productivity by learning time batching, which is grouping like tasks together in a block or batch of time and getting them done.  For example, if an employee interrupts you with questions multiple times a day, train them to come to you only once a day to get all their questions handled at one time.  Take your calls one after the other in a group, and then stay off the phone the rest of the day.  Do the same with email, social media, running errands, and all of your other tasks.

Automation and Procedures

New apps save an amazing amount of time. List all of your time-consuming chores and then find an app that helps you get them done faster.  For example, a scheduling app can reduce countless emails back and forth when setting meetings and appointments.  To-do list or project management software can cut down on emails among you and your staff.  And apps like Zapier can connect two apps that need to share data, reducing data entry.

Leverage

The key to working less is to embrace the concept of leverage.  How can you leverage the business resources around you to save time, increase staff productivity, and improve profits?  It takes discipline and change, two difficult goals to accomplish.  But when you do, you will be rewarded.