RSS feedsAccounting, even in the most complex of businesses, really should not be that difficult. But work with a variety of businesses and it soon becomes apparent that finance departments can descend into desperate muddles. Even when the problem is recognised it can take a long time to rectify.
Finance departments that are becoming stressed and not fit for purpose will usually give out warning signals. If you recognise those signs early enough you can help clients intervene before the situation gets out of control.
Unfortunate events
A series of supposed unfortunate events is a key sign that a finance department is drifting out of control and lacks effective leadership. A handful of famous people have claimed the saying: 'the harder I work, the luckier I get'. A similar slogan for a finance department could be: 'the more organised I am, the less unlucky I am likely to be'. It might not be quite as catchy, but it illustrates an important point. If the finance department is plagued by supposed unrelated accidents, then it is time to see whether there is a genuine run of bad luck, or there is something more systemic going wrong.
So if one month the system falls over and the next month vital data is lost and the following month the key reconciliations won't work, then it is time to lift the carpet and see what's crawling about underneath. It could be a genuine run of bad luck, or it could be a finance department that doesn't have enough skilled finance professionals with the right level of competence. The finance department will be reluctant to acknowledge there is a problem or may not genuinely realise the difficulties that are emerging. It won't take long for the finance director or finance controller to feel decidedly miffed that these questions are being raised so a degree of persistence and toughness is needed to keep fighting to reach the heart of the issue.
Another sign of a finance department where all is not well is missed deadlines. Maybe the management accounts were always finished 10 days after the period-end. If that starts to slip by a day or two, it may be tempting to think that it is not the end of the world. But it is probably worth asking a few polite questions. Has something changed? Has a key part of the management accounts team left, or has a new system been introduced? Or maybe the system is producing some erroneous figures, which the finance department is taking time to fix. It is not just management accounts where this barely perceptible slippage rule applies. It could be any regular information - monthly analysis, cashflow forecasts, anything where the minimum expected is regular filing of information.
Question of organisation
The whole point of a finance department is to collect, analyse and provide information. A good, well organised finance department will take answering (relevant) questions in its stride.
It may even supply information before questions are asked because the query arose in the mind of the finance director or the financial controller as they were compiling and checking the figures and so found an answer which satisfied themselves and made them comfortable in releasing the information to a wider audience.
But, in any case, if the senior management team (or outsiders such as auditors or bankers) ask reasonable questions, they should expect prompt answers. Clearly there are times when answers have to wait, because the department may have other priorities, or the person best equipped to supply the information may be on annual leave. But a definite sign of a troubled finance department is one that goes very quiet when it is asked any question at any time. Some days pass and then you will receive the answer. A delay in receiving an answer is one clue, the quality of that answer is another. If the answer is vague, open to interpretation or simply nonsensical, then the alarm bells will be going off.
The obvious next step is to ask a supplementary question. Having received that answer, check it against the first to ensure the two make sense and are consistent. But then it is important to step back and ask why the delay? Time lags implies the information isn't readily to hand and has to be dug out of a forest of spreadsheets. That is a worry if the data is needed to prepare the accounts. And if the answer is vague or incomplete it suggests a department that is lacking in an understanding of the business it is purportedly reporting on and controlling.
It wasn't me
Perhaps the biggest clue to a finance department in difficulty is the people. All of us give clues to our real thoughts. One indicator that we think things are well is turning up for work. If the department has people on long-term sick leave, or regular sick leave, or where the entry to the finance department may as well be a revolving door, then trouble may be one of the few ever presents. This is of most concern if there is no obvious cause. So if there is no acquisition or merger which always sends up stress levels, or planned redundancies or tough change programmes being pushed by senior management, then why is the finance department such an unhappy ship?
If someone is off long-term with stress, then that is one clear signal. But look out for more subtle signs. Analysing sickness or holiday patterns may reveal a member of the finance team who absents themselves on a regular basis at a particular cycle in the month. Having ruled out idleness, there has to be some other explanation why team members disappear at month-end or quarter-end, or when the auditors are expected. This behaviour is especially significant if it happens among more junior members of the team. Don't dismiss such absences as the lack of commitment of youth or the less qualified. It means they know, or they think they know, something unsettling is happening and they don't want to be associated with it.
Don't become carried away with the idea that if something was wrong we would have been told. Whistle-blowing is the road to hell and those people who do blow the whistle are special characters. Most of us just look the other way or quietly absent ourselves at key moments. If you weren't there to complete the spreadsheet you weren't happy about, or finalise the transaction that looked decidedly dodgy, then if the proverbial did hit the fan none of it would stick on you.
The other end of the spectrum from the member of the accounts team who goes AWOL is the finance director. To lose one FD may be unfortunate, but losing two or more in quick succession looks like a nasty trend. If finance directors are quitting, or being asked to leave by the rest of the management team then the likelihood is that there is a problem (see case study). If FDs are quitting then there are several possible explanations: first they find out something about the company or the accounts which is so awful that makes them run for hills; or second, the company is committing a series of recruitment errors and bringing in FDs who may be competent but not up to this particular job.
A third explanation is the FD realises certain resources are needed to bring the finance department up to scratch or to sort out a particular problem, but the company won't go anywhere near meeting the resources the FD is after. Of course, all this means that the finance department still has a problem.
Case study
One company had gone through more finance directors than the England football team has had managers. One was said to be under powered, another demanded too many resources to sort out the apparent and growing problem with cash and bank. When the third FD was appointed, he avoided confrontation and instead asked PCL Ltd to work with him to bring the cash book and the bank reconciliation under control. The work was a shining example of how a relatively minor problem could spiral out of control. While the company knew something was wrong, it took months to find out where exactly the problem was - and the same length of time to fix it.
The problem was simple: the finance department had lost control of the bank reconciliation. The departing FDs and an unreconciled bank reconciliation caught the attention of the corporate. Over two years, the problem built up as the company collected thousands of unreconciled items.
During that time, giving an accurate picture on cash and debtors varied from very difficult to impossible. We eventually found the source of the problem - when a new system had been installed it had been set up so that small payments were ignored. The result was that these transactions were ending up all over the ledger. It took three months to fix the system so similar transactions went to the right place. It took the same time to go back tracing and fixing all the missing items. It had to be done, we couldn’t write off these items because the bank reconciliation would never work and so the cash figure could never be trusted. It was a small problem with a devastating impact on both the company and on the careers of individuals.
Peter Charles FCMA is a member of the Society of Turnaround Professionals and runs the consultancy firm PCL Ltd
