EricYPTC

Could it be that six checks are better than one?

In an earlier blog (August 12, 2012) I wrote about my 10/80/10 rule: 10% of all nonprofits are “good” organizations who understand how to run efficient effective financial departments; 80% of organizations, the “bad”, mean well but don’t know how to improve their financial processes; and 10%, the “ugly”, know better but choose to do things anyway with their money that they should not.

Here is an example of a bad organization.  They meant well but did not know better.

This organization paid expense bills with as many as six checks.  To make things even more interesting for their vendors, they did not mail the remittance advices along with the checks so vendors did not know what the checks were paying for.  Many vendors, thoroughly confused, had to call the organization to find out what was going on.  It was quite a mess!

When we at YPTC first met with this organization they explained that their in-house accountant seemed to be spending a lot of time paying bills and dealing with vendors and they were wondering why.  It did not take us long to find out!

The logical question is why were they doing this?

I should mention that this is a good-sized organization with an annual budget of $2M.  It is staffed by some smart sophisticated people doing work for many years internationally.  This is not some small recent startup.  The executive director and their COO both knew something was not right with their accounts payable procedures, but they did not know what.

It turns out that this organization gets government funding for five main programs.  Since the programs are government funded, this organization wanted to be scrupulously careful that the restricted funds were only used for their intended purpose.  No argument here…their motive was good.

To accomplish their objective of managing their restricted funds they set up five bank accounts, one for each program.  They had a sixth bank account to pay for other non-funded operating and administrative expenses.  When a bill came in, say the rent bill or the phone bill, they carefully determined how much each program should pay and issued separate checks.  So the landlord or the phone company might receive as many as six checks in the mail to pay for one bill.

Their in-house accountant, for reasons that were never clear to us, then detached the remittance advices from the checks and did not mail them.  (A typical check is printed one check per page with two perforated sections below it containing information about what the check is paying.  Standard practice is to detach one perforated section to keep with the paid bill and leave the other perforated section attached to the check so that the recipient knows what is being paid.)  Many vendors were confused by this.  Since the check amounts did not agree to the invoice amounts, and since there was no remittance advice, vendors had to call the organization to find out what was going on.

Extra bank accounts also meant extra time was needed to reconcile them all each month.  (Their government contracts did not require that funds be physically segregated.)

With all the time needed to write checks, talk to complaining vendors, and to reconcile accounts, it was no wonder that the in-house accountant seemed to be spending all of his time paying the bills!

Fortunately, this story has a happy ending.  First, this organization hired us (sorry for the shameless plug).  We showed them how, by using proper accounting procedures, they could achieve their objective of maintaining tight control over the spending of their restrictive funds, pay bills with just one check, eliminate the need for perplexed vendors to call, and greatly simplify the bank reconciliation process.

We were able to significantly speed up the accounts payable process.  Less time meant less money was spent processing bills.  The improved processes we implemented also resulted in better control over their restricted funds.

This is one of many success stories we have had where something can be done faster, cheaper and better.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

Is it possible to have your year-end audit done faster, better, and cheaper?

Yes, it is very possible, but it takes some planning.

First, remember this number: 90, as in 90 days from start to finish.

You should want and expect to have your audit completed within 90 days of the end of your fiscal year.  If, for example, your fiscal year-end is June 30, then you should have your final audit report in hand by September 30.  If your year-end is Dec 31, your auditors may say they cannot meet this schedule because they are too busy during tax season to have your audit done by March 31.  If they say this, get new auditors (unless they are giving you a huge discount in their fee).

There are some significant benefits to getting your audit done in a timely manner.  First and foremost: financial information is most helpful when it is current.  Second, audits performed closer to your year-end generally go more smoothly than audits done many months later because information is more current and easier to come by.  Third, you look better to your major funders who typically request a copy of your audit.  Try explaining to a program officer at a foundation why nine months after your year-end you still don’t have your audit done.

Getting your audit done quickly, however, will not magically happen by itself.  It requires work, planning, and advance preparation on the part of your organization.

First, months before year-end, before signing the auditor’s engagement letter, have a talk with your prospective auditors.  Let them know you want things done quickly and efficiently.  To meet a 90 day deadline you must be ready for field work to begin by week 5 or 6 after your year-end.  The auditors must complete their fieldwork by week 6 or 7.  The auditors will go back to their offices and prepare a draft audit for your review by week 8 or 9.  Your finance committee or board should review the audit with the auditors, and then the auditors make any changes and present to you the final audit by the 90^th day.  If the auditors agree to this schedule, then you can sign their engagement letter, provided of course that you are happy with all other aspects of your auditor selection.

There is one major caveat for this to work: you must be 100% ready for the auditors when they walk in the door to begin their field work.  100% ready means all schedules and workpapers must be complete, accurate, and they must tie (i.e. agree) to the trial balance.  You cannot feed information piecemeal to the auditors.  If you are not ready, the entire 90 day schedule breaks down, the auditors will have to delay their work, costs go up, and the audit will be delayed.

If you follow this approach you will likely get your year-end audits done faster.  A more timely audit is better for you and for your donors.  And because you are better prepared, the auditors won’t need as much time, so your audit fee should be cheaper.

Faster, better, and cheaper.

Trust me when I tell you the above scenario is very reasonable.  We do it all the time for our clients.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC