Coaching your Controller – Part 1

This article first appeared in CanadaOne, an online business newspaper and resource centre.

As the owner of your business, do you have a person heading up the accounting function who has limited experience managing an accounting and finance function?  Very few SMEs will have an accountant with a designation and strategic skills in that role, which for convenience I will refer to as the Controller (other common titles are Accountant, Office Manager, Accounting Manager, etc.)

As a result, there often is a Controller with good basic accounting skills but limited experience and formal training, reporting to a President who does not know what guidance or direction to give her. In Part 1 of this article we will lay out six simple steps to enhancing the contribution of your Controller.  Next month, in Part 2, we will help you coach your Controller to find the time to implement these improvements.

The situation is often compounded by the Controller being overloaded with work (who isn’t?) and frustrated.  Would your Controller like to be able to do more than balance the books and produce the financial statements that the current accounting package is set up to produce.  In the extreme, management doesn’t even read the monthly financial statements, beyond perhaps looking at the “bottom line.”

This type of scenario is a prescription for a Controller who is considered an overhead and not a “contributor,” who is frustrated and demoralized by their job.  With no one to guide them they often stagnate and continue to do more of the same.

Here are some steps that the President of a business can take to upgrade the value of the Controller, which may seem like extra work but often can help to make the function more efficient (more about this in Part 2, next month) and enhance the satisfaction they get by becoming a valued member of management:

1.    Set a standard for the preparation of your monthly financial statements in number of days after the month end. Ensure that your financial staff are committed to publishing them on time every month e.g. 10th of the month.  This will assist them to keep this as a priority, so that you get the information on a timely basis.

2.    Arrange a meeting with all your senior management, including the Controller, every month, to be held shortly after the financial statements are available.  The Controller should review the results and highlight unusual or unexpected results.  Management should discuss each such item to determine what steps to take.  Consider both good news and bad news. Good news is an opportunity to determine what can be done to repeat the events that gave rise to it and bad news is an opportunity to mitigate the risk of the circumstances recurring.

3.    Having this meeting on a regular and timely basis facilitates management using the financial statements as a springboard to highlight opportunities for action that will enhance the business operations and its profitability.  Ensure that management asks the Controller to explain what has caused major variances from budget and/or preceding comparative periods.

4.    Management and the Controller must prepare a budget annually.  Ensure that it includes an earnings statement budget, balance sheet and cash flow forecast.  Bankers and other outsiders who read budgets are always much more impressed when a budget includes a forecast of the balance sheet at the end of each month and a cash flow statement.  You would also need them for internal purposes so that you are not caught in a sudden crisis, by not anticipating the cash flow consequences of your operating expectations.

5.    If a banker looks at the ratios in a set of financial statements to determine the health of a business, shouldn’t you, the owner, look at the same information? The Controller should prepare a monthly statement of ratios and key performance indicators on a comparative basis.  He should be able to explain, in simple words, why a ratio has changed, so management can consider the trend in each of them and what to do to manage the situation, for better or worse. Some ratios that apply to most businesses are:

• Current ratio
• Quick ratio
• Gross margin percentage, by sales category
• Expenses, in major categories, as a percentage of sales
• Debt to equity ratio
• Days receivables outstanding
• Days inventory on hand

For example, the days receivables outstanding and days inventory on hand are often very good warnings about cash flow problems and often are the first sign that more analysis and focus is required to ascertain exactly where the problem lies, so that management can develop a plan to solve the problem.

6.    In order to stay on top of the business on a timely basis, your Controller should prepare a snapshot of month-to-date information for the Key Performance Indicators (KPI) that are available for your business.  This should not take more than an hour, at most, to prepare, once the format is set.  I find that the most appropriate frequency is to prepare this every Monday for the week just completed, plus on the first day after a month-end so that you have a clear indication of the status of the key areas of the business.  Each business will select different indicators to include in the snapshot.  Some ideas to get you started:

• Sales
• Cost of Sales
• Gross margin %
• Bank balance/Line of credit usage
• Outstanding cheques
• Accounts receivable – aging breakdown
• Days sales outstanding
• Accounts payable – aging breakdown
• Inventory – by major category
• Orders received – # and $ value
• Operating statistics
• Labour statistics

Of course, there are many more depending on the nature of your business and the nature of your tracking systems.

In Part 2 of this article we will address where the Controller can find the time to implement these improvements.

James Phillipson is a Chartered Accountant and a Principal of Mastermind Solutions Inc. with extensive experience in large and small businesses.  He has provided financial counselling to his clients since 1996, often in the role of or as a coach to a Controller or Chief Financial Officer.  James has experience in financial roles in a wide variety of businesses and industries.