Accounting Best Practice

Accounting Best PracticeFrom now on, I am going to add “Accounting Best Practice” as a separated category which will give overview of situations in which best practices implementations are most likely to succeed, what factors are most important to the success or failure of an implementation, and how to successfully create and follow through on an implementation project.

The scope of this category does not encompass all of the best practices that a company should consider, only those used by the accounting department. So this category will be TOTALLYAccounting Best Practice”. This area is especially susceptible to improvement through best practices, since it is heavily procedure-driven. By following the recommendations made in this post later on, not only those regarding how to implement, but also those regarding what not to do, a manager will have a much higher chance of success.

With this special category, I do hope that you will be able to select those practices having the best chance of a successful implementation, based on the specific circumstances pertaining to each manager, such as the funding, time available, and any obstacles, such as entrenched employees or a corporate intransigence pertaining to new projects.

 

What is Really an Accounting Best Practice?

A best practice is any improvement over existing systems, though some consultants prefer to confine the definition to those few high-end and very advanced improvements that have been successfully installed by a few world class companies. This category uses the broader definition of any improvement over existing systems, since the vast majority of companies are in no position, in terms of either technological capabilities, monetary resources, or management skill, to make use of truly best practices. Using this wider definition, a best practice can be anything that increases the existing level of efficiency, such as switching to blanket purchase orders, signature stamps, and procurement cards to streamline the accounts payable function. It can also lead to improved levels of reporting for use by other parts of the company, such as activity-based costing, target costing, or direct costing reports in the costing function.

Further, it can reduce the number of transaction errors, by such means as automated employee expense reports, automated bank account deductions, or a simplified commission calculation system. By implementing a plethora of best practices, a company can greatly improve its level of efficiency and information reporting, which fits nicely into the requirements of most strategic plans.

One can go further than describing best practices as an excellent contributor to the fulfillment of a company’s strategy, and even state that a strategy does not have much chance of success unless best practices are involved.

Why?

The reason is that best practices have such a large impact on overall efficiencies, they unleash a large number of excess people who can then work on other strategic issues, as well as reduce a company’s cash requirements, releasing more cash for investment in strategic targets. In addition, some best practices link company functions more closely together, resulting in better overall functionality—this is a singular improvement when a company is in the throes of changes caused by strategy shifts. Further, best practices can operate quite well in the absence of a strategic plan. For example, any department manager can install a variety of best practices with no approval or oversight from above, resulting in a multitude of beneficial changes. Thus, best practices are a linchpin of the successful corporate strategy, and can also lead to improvements even if they are not part of a grand strategic vision.

When there are many procedures, there are many opportunities to enhance the multitude of procedure steps through automation, simplification, elimination of tasks, error proofing, and outsourcing. Thus, of all the corporate functions, this is the one that reacts best to treatment through best practices.

Each post within this category will describe a cluster of best practices, with a functional area itemized under each post. For example:

  1. Improvements to a company’s commission calculation and payment systems. A strictly concerned with a variety of payroll-streamlining issues related to the collection of employee time information, processing it into payments, and distributing those payments.
  2. The use of process-centering, on-line reporting, and creating a contract-terms database. This information gives you a good idea of which best practices to search for and read through, in case these criteria are a strong consideration.

 

This category is added to assist anyone who needs to either improve the efficiency of the accounting department, reduce its error rates, or provide better information to other parts of a company. In short, this is the perfect do-it-yourself fix-it category for the manager or whoever likes to tinker with the accounting department.

 

Types of Best Practices

There two main types of best practices, each one requiring considerably different implementation approaches:

  1. The first type of best practice is an “incremental” one. This usually involves either a small modification to an existing procedure or a replacement of a procedure that is so minor in effect that it has only a minimal impact on the organization, or indeed on the person who performs the procedure. The increased level of efficiency contributed by a single best practice of this type is moderate at best, but this type is also the easiest to install, since there is little resistance from the organization. An example of this type of best practice is; using a signature stamp to sign checks“; it is simple, cuts a modest amount of time from the check preparation process, and there will be no complaints about its use. However, only when this type of best practice is used in large numbers is there a significant increase in the level of efficiency of accounting operations.
  2. The second type of best practice involves a considerable degree of “re-engineering“. This requires the complete reorganization or replacement of an existing function. The level of change is massive, resulting in employees either being laid off or receiving vastly different job descriptions. The level of efficiency improvement can be several times greater than the old method it is replacing. However, the level of risk matches the reward, for this type of best practice meets with enormous resistance and consequently is at great risk of failure. An example of this type of best practice iseliminating the accounts payable department in favor of having the receiving staff approve all payments at the receiving documents“; it involves the elimination of many jobs and is an entirely new approach to paying suppliers. A single best practice implementation of this sort can reap major improvements in the level of accounting efficiency.

 

Given the considerable number and size of the differences between the incremental and reengineering best practices, it is necessary to first determine into which category a best practice falls before designing a plan for implementing it. Given the difficulty of implementation for a reengineering project, it may even be necessary to delay implementation or intersperse a series of such projects with easier incremental projects, in order to allow employees to recover from the reengineering projects.

 

What Environment is Most Suitable for Best Practices?

Before installing any best practice, it is useful to review the existing environment to see if there is a reasonable chance for the implementation to succeed. The following points note the best environments in which best practices not only can be installed, but also have a fair chance of continuing to succeed:

  1. When benchmarking shows a problem. Some organizations regularly compare their performance levels against those of other companies, especially those with a reputation for having extremely high levels of performance. If there is a significant difference in the performance levels of these other organizations and the company doing the benchmarking, this can serve as a reminder that continuous change is necessary in order to survive. If management sees and heeds this warning, the environment in which best practices will be accepted is greatly improved.
  2. When management has a change orientation. Some managers have a seemingly genetic disposition toward change. If an accounting department has such a person in charge, there will certainly be a drive toward many changes. If anything, this type of person can go too far, implementing too many projects with not enough preparation, resulting in a confused operations group whose newly revised systems may take a considerable amount of time to untangle. The presence of a detail-oriented second-in-command is very helpful for preserving order and channeling the energies of such a manager into the most productive directions.
  3. When the company is experiencing poor financial results. If there is a significant loss, or a trend in that direction, this serves as a wake-up call to management, which in turn results in the creation of a multitude of best practices projects. In this case, the situation may even go too far, with so many improvement projects going on at once that there are not enough resources to go around, resulting in the ultimate completion of few, if any, of the best practices.
  4. When there is new management. Most people who are newly installed as managers of either the accounting department or (better yet) the entire organization want to make changes in order to leave their marks on the organization. Though this can involve less effective practice items like organizational changes or a new strategic direction, it is possible that there will be a renewed focus on efficiency that will result in the implementation of new best practices.

 

In short, as long as there is a willingness by management to change and a good reason for doing so, then there is fertile ground for the implementation of a multitude of best practices.

 

Planning for Accounting Best Practices

A critical issue for the success of any best practices implementation project is an adequate degree of advance planning. The following points describe the key components of a typical best practices implementation plan:

  1. Capacity requirements. Any project plan must account for the amount of capacity needed to ensure success. Capacity can include the number of people, computers, or floor space that is needed. For example: if the project team requires 20 people, then there must be a planning item to find and equip a sufficient amount of space for this group. Also, a project that requires a considerable amount of programming time should reserve that time in advance with the programming staff to ensure that the programming is completed on time. Further, the management team must have a sufficient amount of time available to properly oversee the project team’s activities. If any of these issues are not addressed in advance, there can be a major impact on the success of the implementation.
  2. Common change calendar. If there are many best practices being implemented at the same time, there is a high risk that resources scheduled for one project will not be available for other projects. For example: a key software developer may receive independent requests from multiple project teams to develop software, and cannot satisfy all the requests. To avoid this, one should use a single change calendar, so that planned changes can be seen in the context of other changes being planned. The calendar should be examined for conflicts every time a change is made to it, and also be made available for general review, so that all project teams can consult it whenever needed.
  3. Contingencies. For example: if the project team is being set up in a new building, there is always a chance that phone lines will not be installed in time. To guard against this possibility, there should be an additional project step to obtain some cellular phones, which will supply the team’s communications needs until the phone lines can be installed.
  4. Dependencies. The steps required to complete a project must be properly sequenced so that any bottleneck steps are clearly defined and have sufficient resources allocated to them to ensure that they are completed on time. For example: a project planning person cannot set up the plan if there is no project planning software available and loaded into the computer. Consequently, this step must be completed before the planning task can commence.
  5. Funding requirements. Any project requires some funding, such as the purchase of equipment for the project team or software licenses or employee training. Consequently, the project plan must include the dates on which funding is expected, so that dependent tasks involving the expenditure of those funds can be properly planned.
  6. Review points. For all but the smallest projects, there must be control points at which the project manager has a formal review meeting with those people who are responsible for certain deliverables. These review points must be built into the plan, along with a sufficient amount of time for follow-up meetings to resolve any issues that may arise during the initial review meetings.
  7. Risk levels. Some best practices, especially those involving a large proportion of reengineering activities run a considerable risk of failure. In these cases, it is necessary to conduct a careful review of what will happen if the project fails. For example: can the existing system be reinstituted if the new system does not work? What if funding runs out? What if management support for the project falters? What if the level of technology is too advanced for the company to support? The answers to these questions may result in additional project steps to safeguard the project, or to at least back it up with a contingency plan in case the project cannot reach a successful conclusion.
  8. Total time required. All of the previous planning steps are influenced by one of the most important considerations of all—how much time is allocated to the project. Though there may be some play in the final project due date, it is always unacceptable to let a project run too long, since it ties up the time of project team members and will probably accumulate extra costs until it is completed. Consequently, the project team must continually revise the existing project plan to account for new contingencies and problems as they arise, given the overriding restriction of the amount of time available.

 

The elements of planning that have just been described will all go for naught if there is not an additional linkage to corporate strategy at the highest levels. The reason is that although an implementation may be completely successful, it may not make any difference, and even be rendered unusable, if corporate strategy calls for a shift that will render the best practice obsolete. For example, a fine new centralized accounts payable facility for the use of all corporate divisions is not of much use if the general corporate direction is to spin off or sell all of those divisions.

So, proper integration of low-level best practices planning with high-level corporate planning is required to ensure that the correct projects are completed. Given the large number of issues to resolve in order to give an implementation project a reasonable chance of success, it is apparent that the presence of a manager who is very experienced in the intricacies of project planning is a key component of an effective project team. Consequently, the acquisition of such a person should be one of the first steps to include in a project plan. This section described in general terms the key components of a project plan that must be considered in order to foresee where problems may arise in the course of an implementation. We now proceed to a discussion of the impact of time on the success of a best practices implementation.

 

Timing of Best Practices

The timing of a best practice implementation, the time it takes to complete it, and the pacing of installations have a major impact on the likelihood of success. The timing of an implementation project is critical. For example: an installation that comes at the same time as a major deliverable in another area will receive scant attention from the person who is most responsible for using the best practice, since it takes a distant second place to the deliverable. Also, any project that comes on the heels of a disastrous implementation will not be expected to succeed, though this problem can be overcome by targeting a quick and easy project that results in a rapid success—and that overcomes the stigma of the earlier failure. Further, proper implementation timing must take into account other project implementations going on elsewhere in the company or even in the same department, so there is no conflict over project resources. Only by carefully considering these issues prior to scheduling a project will a best practice implementation not be impacted by timing issues.

In addition to timing, the time required to complete a project is of major importance. A quick project brings with it the aura of success, a reputation for completion, and a much better chance of being allowed to take on a more difficult and expensive project.

Alternatively, a project that impacts lots of departments or people, or that involves the liberal application of “cutting-edge technology”, runs a major risk of running for a long time; and the longer the project, the greater the risk that something will go wrong, objections will arise, or that funding will run out.

Most critical question on this topic is “How to implement accounting best practice?”, hold on, I will be back to answer the question on my up-coming post.

Author: Lie Dharma Putra

Putra is a CPA. His last position, in the corporate world, was a controller for a corporation in Costa Mesa, CA. After spending 15 years as a nine-to-five employee, he decided to serve more companies, families and even individuals, as a trusted business advisor. He blogs about accounting, finance and tax, during his spare time, and helps accounting students (around the globe) to understand the subject matter easier , faster. Follow him on twitter @LieDharmaPutra or add him to your circle at Google Plus Lie+

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