I often speak with business owners who thought they had appropriate cost and financial controls in place, only to be blindsided when they discover they do not. Here are 5 signs that your financial controls might not be adequate:
1. You get an overdraft notice from your bank. This is always bad news. The likely culprits include:
• Higher than expected labor costs, which were not being properly tracked.
• Poor A/R collections, with no controls to recognize problem accounts.
• Data entry errors that made it look like you had more money in the account.
• Bank reconciliations that are not taking place in a timely manner.
2. Inventory numbers in the system don’t agree with the physical count. While some minor variances are often to be expected, these numbers should never be significantly off.
In addition to theft, the likely culprits include:
• Data entry errors – With no controls in place to catch them.
• Receiving shortages – Instead of counting items when received, Receiving assumes the packing slip is correct.
• Shipping errors – With no double-check that the correct items and quantities are being shipped.
3. Inventory values in the system don’t reflect reality. Instead of keeping a detailed perpetual inventory, some companies make the mistake of relying on gross profit percentages to track the value of inventory on hand.
For example, they assume a 35% gross profit margin on everything in category X. If they sell 1000 items from category X for $1.00 each, they subtract $650 from the inventory account. But if the actual gross profit margin on some of these items is not 35%, the inventory values in the system will be incorrect.
4. Profits on completed jobs are lower than expected. This is an indication that better financial controls are needed at every step of the job, from estimating through delivery. A weekly financial dashboard showing a snapshot of how the project is doing on key metrics, coupled with a monthly job cost schedule that drills down into the details, can be very helpful here.
5. You’re paying for people who don’t exist or time that wasn’t worked. This type of fraud is usually discovered when someone notices payroll is higher than expected. Ensuring you have a good time system, and having someone in management other than the Controller review paychecks before they are distributed, can help avoid these situations.
Want to bring in an outside expert to review your financial controls and recommend areas for improvement? Give me a call. As a part-time CFO, this is one of the many services that I provide.