Business Management zone

FD's Diary: Auditors' fate is sealed

July 16 – That end of term feeling. Two weeks away from here coming up.

After ten months in the job I feel able to leave the team in charge and feel confident little will go wrong.

I’m taking my phone, I admit. And I’ll turn it on once a day. But I’ve told them it has to be a real crisis before they ring or they’re in deep trouble on my return. I need a break. Admittedly I have a slight crisis about taking the children out of school a few days early but any holiday has to also fit my wife’s work commitments. And it’s the best we can do. And I’m going to make the most of it.

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July 15 – Well, that’s done and dusted.

As is usual the AGM was a routine matter. We undertook the business, passed elective resolutions for the future, approved and signed the accounts (the CEO and Mrs CEO sitting at far ends of the table and Ops and I passing stuff between the two). Mrs CEO’s man came along and muttered but seemed to think all was in order at that stage. The auditors had their formal invite as required by law but chose not to come.

Which was the final nail in their coffin. I took the chance to discuss my opinions of their performance which got Mrs CEO’s man very animated. He was very happy to see a new auditor appointed as he felt that this would protect his client’s interests in the company and would be happy to suggest a short list.

At which point the CEO pointed out that he wanted his interests protecting too and so an independent list should be drawn up, and suggested I have the job. I agreed. Mrs CEO’s man wanted to be on the assessment panel. Fine said the CEO. He’d come along too. Mrs CEO wasn’t so sure about that. And it was also not clear she wanted to pay her man to do this work (and I’m blowed if we’re going to) so suddenly he looked like he was adding no value for anyone except the hot air machine. So again, they agreed I should set things up and invite the shareholders along to final presentations to decide, but neither could attend if only one chose to do so or chose not to send a representative.

That took a long time to agree. Re-electing the auditors would, in retrospect have been easier but I couldn’t by then admit I was also now nicking their staff.

And that mean that the board meeting was limited in scope. The accounts were acknowledged. Was the hard work rewarded? No, frankly the new balance sheet reports were hardly noticed as far as I could see by anyone but Ops (who is keen and says we must have a training session for all mangers on what they mean when I get back).

And as for the decision on the problem division? I was told that the only thing that matters was cash flow. If we could make more by closing the division, we should, so long as we could arrange a subcontractor to take referrals for the work. Ops thinks this is a plus as he’s already got someone lined up. We’ll only get 5%, but 5% for little work is better than we’re doing now. And without turning over most of the people who work in the division and recruiting afresh – something that will be hard to do and has no guarantees of success, we can’t see how we’ll solve this now we see what the problem is.

Another one for the “post holiday” list to look at then.

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July 13 – Met with the audit junior last night. It’s rather odd taking a young woman out for a drink a few weeks after making a complaint about her dress sense. But such is the price one pays for seeking to recruit in an unconventional manner. At least she had the decency to be nervous.

It transpires that she is not happy where she is. The key issue is study leave. She has ambitions and is bright (as I had correctly perceived) and wants to get her ACCA exams. The firm she’s with values chartered students but she went to them having already begun ACCA and has stuck to it. They don’t seem nearly as generous to their ACCA staff.

She’ll come to us for no pay increase if we’ll give her four weeks guaranteed study leave a year on top of her holidays. Given she would be covering for another part-time student it seems to me that this is a deal worth having. Her pay rate is less than I would have offered, and I’m sure I’ll get commitment in return.

We shook hands. A formal letter will have to wait a couple of weeks until I’m back. And she’ll start in September.

That has then given me two problems. Are we up front with the auditors or do we place a small ad to suggest she applied? Even as I write this I know I’m just going for the upfront approach and will blame the developing friendship between her and #4. And what to call her is the other problem. #4A doesn’t seem fair. I’ll have to muse on that.

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July 12 – Too much of a weekend! The accounts fell out without much problem, which was a relief. And the new reports have a structure now, even if the team have some work to do to get data into them today.

The real sweat was over our “problem” division. In theory this should be good for us. It’s a clear business model. Others supply this service and one can only presume they make money from it. But for us it’s a heartache. Maybe it’s because it is a bit of a tack-on extra service which we began to do in response to customer enquires and which we have only ever been half-hearted about. But getting to the bottom of the problem has taken effort.

In principle we act as a main contractor in this division. We get the client and agree the spec with them. As we don’t have the design skills for the product in-house we contract those out, but the design comes with a theoretical materials spec which should make buying easier. Then we assemble a team, based around one or two of our core people plus subbies when needed and do the job. It should be easy. Much of it should be “cost plus”, at least as a guide.

But the margins just don’t come out like that. And when I worked it back I came back to the original specs for the work as the source of the problem. I audited four jobs from quote to completion and found that the quotes were often sent before the full spec had been agreed here, so material pricing was uncertain. Then there was inconsistency in labour rates, let alone mark-up. After that it transpired that materials usage and labour expended seemed to always exceed estimate. We all know it will sometimes, but in this case it seems to be a pattern. So I then looked to see if there were chargeable variations, and it seems that quite often there were, but there’s been no effort to bill them.

All of which suggests that most of the problems we’ve been picking up reactively have been the result of poor quoting and design from the outset, which has never given us a chance.

Now that wasn’t the problem I expected to go to the board with. I just thought it was inherently unprofitable. Now I’m not sure. In principle with better quoting, management and control plus the willingness to tackle variations as a billing issue this could make money. And in that case the problem changes. Now the question is are we willing to tackle the issues given that this is still peripheral business? Or are we better off seeking to take a small commission on passing the whole business on to someone else?

At least knowing that has given me a structure for my paper and a question on which I want a decision. Always best to go with a pre-prepared question, in my opinion.

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July 9 – The shareholders have both said yes to a meeting next Wednesday. That will get all the AGM stuff over before I go on holiday. Which has to be good news.

It also means I’ve agreed to meet the audit junior on Monday evening for an “informal chat”. #4 and she seem to have become close pals now. It would make life a lot easier here if such an easy supplement to the team were available when #4 heads off for university in September.

In the meantime we all have our heads down. I’m working on the report on our troublesome division and know I have to reach a solution to the issue early next week. #’s 3 and 4 are working on my other project – how to re-present the accounts. The bit that has really grabbed their imagination (to my surprise) is how to provide meaningful balance sheet data. The fact is I really don’t think anyone here (bar me, I hope) has a real idea of what a balance sheet is about, so why put such emphasis on it?

We’ve already come up with a long list of alternatives to back up the data we present and are going to try them out on the June accounts, which I’m also going to try to have out for the meeting next week.

On fixed assets the alternative is easy. It’s a list of what we’ve bought this year, and what we’ve sold or scrapped too. Since this is straight from the fixed asset register (now up to date), that’s easy.

Stock as ever is harder so we’re thinking of two reports in addition to absolute value. The first is the top 10 items by value. The other the slowest moving 10 items by value.

Debt is easy. Again it’s two reports. The first is the biggest ten debtors. The next is the oldest ten we’re wanting to chase. The odd few pound balances we’ll ignore. Ageing will also be reported on average as a moving target.

Prepayments is a list of the big ones with explanation.

Creditors splits several ways. Trade creditors is the big ones and creditor days plus notes on any disputes. Accruals will be treated like prepayments. We have income in advance so when this is significant we’ll report who has paid it and why. VAT and PAYE we’ll just report the control accounts balance (as they do) and how many months are due (for VAT).

I hope cash speaks for itself, but did wonder whether to attach a bank rec. That would then report it’s under control. I might just do that, at least at first.

Two things fall out of this. The first is that I bet pivot tables would help here. The second is the team seem to quite like the idea of producing this stuff, because it’s relevant to them too. The plus of that is I can delegate it. It will even make the accounts more usable in-house.

Why didn’t I do this before? I suppose the real answer to that is because it will take up much of my weekend. But at least holidays are only a week away.

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July 6 - I mentioned recently that Ops is keen I don't change the format of the accounts for the time being so that the shareholders don't get too upset by frequent changes. But I've decided to argue with him.

Accounts here (and in quite a number of the business I've seen of about this size) cover historic performance to date and by month and compare both with budget and last yea. We show variances in absolute and percentage terms and by that point the page is pretty well covered in ink. I've got some problems with that. First of all too much ink is off-putting, so I want to split things up a bit, and second it's all too backward looking.

The splitting it up a bit seems to be the easy bit. I know that if things are much as I expect I don't really delve too much further into the figures in a set of accounts. Most of the time I'm not looking for trouble if I can avoid it! So I want to reflect this in a high level summary sheet. This would show company totals for sales, costs of sale, gross profit, overheads and profit and do the comparisons for these. It might also have summaries of stock in hand, debt and debtor days, cash, creditors and creditor days on a separate page instead of a balance sheet (because I have a sneaking suspicion none of them really understand the balance sheet anyway). It's my instinct that this page should be the launch point for an enquiry into the accounts that follows.

Then I want to look at each of those in more detail on a further summary page which will show divisional totals for each of the totals on the company page. Only from there do I want to go into fine detail division by division. This seems to me to provide an obvious "drill down" into the data so that enquiries can be made at various levels, or not at all as required.

Ops isn't sure but I'm giving myself the task of doing the June accounts on this basis as well as the conventional one. I'd love to say my recent Excel course made this easier, but if I’m honest it hasn't. The slog of linking data together still seems to require the application of whatever intellect I have to offer. But I think it will be worth it.

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July 5 - #4 tells me the audit junior would like to meet me about the possibility of working for us.

I say I'd be delighted to do so, but suggest it would be politic to get the AGM out of the way first of all. This reminds me to do two things. The first is call it, the second is to set the agenda for the next shareholder meeting which might as well happen at the same time.

This sets Ops and me thinking. What is it we do want to discuss? It seems to me that the power of the person who calls the meeting is to seek to focus the discussion that follows. We're now over one quarter into our trading year and in my thinking that's a pretty crucial moment. We’ve got the first quarter accounts. We have some idea how sales are shaping up. It's a first real opportunity to get a good feel for the year.

Thankfully the accounts are looking OK, overall. Our targets were realistic and we're achieving them on sales. As far as Ops can tell he thinks the sales pipeline is OK, but I remain worried that this is not well enough documented and the data I have does not support his optimism. But getting sales people here to admit to anything, even the day of the week, is like asking for blood out of a stone. And costs are sort of OK, although we've had some big hits in some areas, such as vehicle insurance which has come in way above expectation due to our accident record last year.

But those are the headlines. Underneath them there are more important stories. We know that one of our five divisions is a lame duck at present. It's small, and we can disguise whether it's OK or not by cost reallocation (or not). But we realise that this activity must have been one of the things the CEO spent too much time on in the past as it's now taking up too much time for everyone else.

So what do we do? It's not been the habit of this company in the past to reallocate central management time to divisions. It's just been assumed they all contributed into the pot out of which those costs were paid. But that's not helping decision making here because it's the diversion of central resources that's destructive in this case, and it's everything from Ops time to mine in having to spend ages on contracts, debt recovery and excessive staff turnover in relation to activity.

We spent Friday discussing this over lunch - which is when we usually (literally) chew things over. Ops isn't keen to change the format of the accounts too much right now. We want the shareholders to stay in a routine. Equally, he wants to work out what's really happening. I ended up agreeing to produce a special report for the meeting.

In the meantime we put it on the agenda as "Review of the X Division" and agree that this is sufficiently ambiguous that we could cover just about anything under that heading if we decide not to back our suspicions with a call for action at this stage.

Of course, there’s one final problem. We’re entering holiday season. I’m going in 2 weeks. Will they agree to short notice?

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July 2 - If you thought you were good at Excel go on a course! I now think I'm a beginner. It was embarrassing to discover how little I knew.

Going on a locally run course was a good idea. There were only five of us and the tutor was excellent. She really did seem to know her stuff. But the best thing about what she did was to check what everyone wanted and then seemed to build the day around it.

Having said which we didn't really do much on those pivot tables I thought I wanted to know about because there was so much else I realised I didn't know. As a result I was more than happy to get involved in functions I'd never heard of, let alone thought about using, formatting in whizzy ways to make things look good (and I again thought I knew how to do that) and macro writing at more advanced levels than I'd ever tried. So I was quite happy that we never got to some of the issues I thought of concern. I got more than enough out of the day to make me think it worthwhile going again to cover what I missed.

It's made me realise that 20 odd years of self taught spreadsheeting has left me with huge gaps in my knowledge. If you haven’t thought about such a course, I'd recommend you do.

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June's diary detailed how the FD tried to lure one of his auditor's juniors to the company.

Follow the FD's saga through the preceding months:
May April March February January
December
November
October.

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