In this episode, we discuss what to do in your first week as a controller.
The Need for Cash Forecasting
What should new controllers do in their first week? The answer is simpler than you might think. Always focus on the ability of the business to survive. So, if there’s not enough cash to pay the bills, then all other activities are insignificant, because the company won’t be in business. Based on that one issue, your absolute first task is to create a short-term cash forecast. Just put one together on an electronic spreadsheet, nothing fancy. The goal is to know the expected cash balance at the end of each week for the next month.
Second in priority is understanding the receivables situation. To do that, review the accounts receivable aging report with the collections people, to understand which customers pay on time, and which ones don’t. In addition, review all non-trade receivables, like employee loans, and figure out which ones can be collected, and when. Adjust the cash forecast based on what you find out.
Third in priority is understanding payables. To do that, review the accounts payable aging report with the payables folks, to learn about the payment terms associated with each supplier, the relations with each one, and which supplier invoices are likely to arrive during the cash forecasting period. Adjust the cash forecast based on what you find out. You might be detecting a pattern here.
Next up, review the schedule of debt payments. These payments might be automatically taken out of the company’s bank account by the bank – if it happens to be the lender – so that means you’ll have a reliable estimate for cash outflows related to debt – which you can plug into the cash forecast.
And for our last cash item, make sure that the bank reconciliations are up to date. If they haven’t been done, you might find that the company’s recorded cash balance is wrong, because it doesn’t include any fees that the bank took out of the account. If you find issues, make sure the cash forecast is updated.
So, all of those items – either directly or indirectly – involved cash. By working through those steps, you’ll end up with a cash forecast that should be reasonably accurate. That will tell you if the company is in trouble, or if you can proceed to working on other matters.
Set Up a Measurement Tracking System
Assuming that cash is not an issue, the next step is to create a system of measurements, so that you can monitor the condition of the company. Initially, this is all about spotting any critical issues that the company may have. So, you might want to calculate a trend line for the past few months for things like days of receivables outstanding, days of inventory on hand, gross profit margin, and net profit margin. And in particular, be sure to measure anything that has to be reported to the bank as part of the company’s loan covenants – like the current ratio. You definitely don’t want to breach the loan covenants, so stay on top of whatever measurements the bank wants to see.
Initially, just stick with measurements that you can pull out of the financial statements. Any other metrics that have to be derived with new systems should be left for later.
Investigate the Accounting Department
You should be able to complete everything I’ve talked about within the first couple of days. Next, spend some time investigating the accounting department. First up – of course – is reviewing collections, since these people can have a major impact on cash flow. Take a look at how collections are assigned, how everyone is performing, and whether there’re any collection tools they could be using to improve results. The immediate focus is on making the collections function more efficient.
After that, review billings, because it also impacts cash flow. In particular, look at how quickly billings are issued after products are shipped, to see if there’re any delays. If so, figure out what can be done to accelerate the billings. That covers the immediate issues related to cash flow.
After that, take a look at payroll. The reason I prioritize it right after cash flow is reputational, because any screwups in payroll reflect badly on the accounting department. It can take time to learn about payroll problems. Early on, you’re just trying to get a feel for what’s happening, so a good way to find out is to schedule a few lunches with the other department managers, and ask them. This might give you a few ideas for immediate fixes.
One more area that definitely needs a look is accounts payable. The main target at this point is just getting a feel for the process flow and where problems have occurred in the past. You’ll want to see if there’re any control problems that need to be fixed, and see if there might be any obvious efficiency improvements to start working on.
These investigations are not supposed to be overly detailed. You’re trying to get a feel for what type of a mess you’re walking into, so you can identify the larger issues and figure out what needs to be worked on first. You should also have a better idea of the strengths and weaknesses of the accounting staff.
It can also make sense to review a few documents to learn more about what other people say about the accounting system. For example, find the auditor’s management letter from the last couple of audits. This letter goes to the company president, and it itemizes any actual or potential control problems noted by the auditors. For even more information, schedule a lunch with the audit manager to discuss any other issues that might not have been included in the management letter.
If the company is big enough, it might have internal auditors. If so, ask them for any reports they’ve issued on the accounting department within the past couple of years.
One other source of information is the financial statement disclosures. The company might have revealed accounting problems in those disclosures. Don’t spend too much time on this one; any references made will probably be watered down.
So that’s what I would do during my first week as a controller. The intent is to get a decent overview of the situation, so that you can make plans from there for improvements. If you uncover something major – like a cash flow problem – then that’s definitely going to concentrate your attention.