B2B CFO^®    (877) 4-B2B CFO

We called them “surprise” counts because the tellers and branch managers were not supposed to know when we were coming or in theory they would be extra careful with their closings that day.  But, they generally had a pretty good idea around the time of the year we would show up.

One client bank, in a small rural town in southern Indiana, was scheduled by us for the surprise cash count in early fall.  We had a staff of 8 people to cover the branches and the home office.  We loaded up in our cars to drive to the town the evening before, so that we could show up early the following morning, do our surprise cash count audits, and head home.

As we pulled in to the parking lot at one of the two motels in town, imagine our surprise when, there on the neon sign, just below the motel name, it blazed out “Welcome Peat Marwick”.  You see, the secretary had confirmed the motel reservations in the Firm’s name, not in the name of an individual, and given that we were taking 8 rooms, in a small town, with only two motels, we were big customers.  So, we were loudly welcomed and announced to the town.  When we showed up at the branches the next morning, the managers had a pretty good laugh at our expense.  Everyone knew we were coming.  The cash counts were perfect (they usually were).

The point is that if you are going to surprise examine books and accounting records, it must be a surprise, or there is no purpose.  It does not always have to involve the outside auditors.  Good internal auditors, controllers, CFOs, and the like are continually “auditing” the numbers they get from the business departments in their companies.  They always have a skeptical approach, they investigate different areas and departments, and they begin their work unannounced.

In my CFO role for my clients, I examine different sets of numbers “unannounced” periodically.  One month it might be a review of the inventory systems, another the receivable collection efforts, another the purchasing departments.  Most clients have very good internal accounting systems and each component need not be investigated every month.  But, random and surprise analyses go a long way towards making sure the accounting and financial systems are and remain accurate, so the numbers produced are worthwhile for management to use in cash flow analysis and planning.  The fact that someone is going to take a look, periodically, unannounced, causes the staff to stay alert and do good work, all the time.  Ronald Reagan said, in reference to our Russian “ally” at the time, as we were negotiating reductions in nuclear warheads:  “Trust But Verify”.  Same thing goes for financial information.

By the way, the next year, we gave up even trying to get motel rooms in that small town.  We stayed in a nearby city, and booked the rooms on our personal credit cards, in a couple of different hotels.  The surprise worked, but no surprise to us, the cash counts were still clean.  They were a well run bank and a good client.

I have many years experience in the health insurance industry.  Now that we have Obamacare, I thought I should share what I recommend to my clients:  GET OUT OF THE HEALTH INSURANCE BUSINESS!

The new health insurance reform bill mandates that employers offer coverage to all employees beginning in 3 years, if they employ more than 50 employees.  That’s a straw man.  Most employers over 50 employees already offer health insurance.

Health insurance reforms passed in 1996 mandated that insurers guarantee issuance coverage to any employee of groups with less than 50 employees, no matter the employee’s or dependent’s health conditions.  That is what has caused the massive increase in premiums for small employers.  It is technically called a “death spiral” by the actuaries.  But, the practical impact is that 15 years ago, group health insurance cost 30% less than individual health insurance. Today, small group health insurance costs 30% to 50% more than individual policies, for the same coverage, because the insurance carriers must  cover prior medical conditions.

Obamacare mandates that individuals purchase health insurance beginning in 2014.  The same death spiral will occur in individual policies.  But, between now and then, individual coverage will remain substantially cheaper than group.  Example:  I have one client that is planning to drop its health insurance coverage for their 13 employees and provide an agent to assist the employees in buying individual policies from any insurance company they choose.  My client will contribute $100 per month for single employees, and $300 per month for employees with family coverage.  The employees will need to pay the rest.  In this case, and not atypical, the employee contribution for individual coverage will be lower than their current 30% share of their group premium.  And my client will save between $40,000 and $50,000 per year on their cost of the insurance.

The employees will turn in their health insurance premium invoice, and my client will reimburse up to $300 per month. The reimbursements are tax exempt to the employee, just like the group coverage, and they are deductible by my client, just like the group coverage.  The only caveat is that the employee does not have the option of taking cash, they must show an insurance bill.  By the way, reimbursements done in this fashion are FICA exempt as well, just like group health.

The one problem is employees or dependents with medical conditions might not qualify for individual health insurance coverage, since pre existing conditions will still be excluded, at least until Obamacare takes full effect.  Most states already have high risk pools for the purpose of providing coverage to those who do not qualify in the private market (Indiana, where I live has such a pool).  Obamacare is implementing a federal/state high risk pool right away for those states that do not.  The premiums in these plans can be higher than the private market, even though they are subsidized, but the employer can increase wages to compensate.

The rate spiral that has tripled the cost of small employer health insurance will simply continue, probably  accelerate.  Individual policies are dramatically less expensive, at least for now.  We will see how it plays out after 2014.  But for now, small employers that stop offering group health insurance can save thousands (per employee!), the employee can save on their own portion of the premiums, and the employer is forever out of the health insurance business, at least until they have 50 employees (which is a good problem to solve another day).

GET OUT OF THE HEALTH INSURANCE BUSINESS!

Many years ago, when I was CFO of a mid size but fast growing insurance company, we broke the payment system.  It didn’t really break, it just quit.  We were growing so fast that the number of payments needed to move through the system could not be physically input and spit out with a check, just because the hardware and software were no longer sized right.  The processors would just lock up.  It was horrible.

Solution:  we visited an insurer that was processing volumes higher than ours who had purchased a standard industry software package, and then customized it.  They were very pleased with it.  The package cost $50,000.  That was a lot back then for this kind of software.  The problem was it had taken the company over 18 months to customize and install.  But, once done, they were very pleased.  It did all of the unique and company specific tasks on the payables, the checks, and the accounting that they wanted.  But, I didn’t have 18 months.  I had none.  We could not get checks processed, right now, let alone 18 months from now.

We bought the package in November and told the vendor we wanted it live by January 1.  The vendor said that was impossible and would not warranty it.  No matter.  We bought it.  We were out of time and out of alternatives.  We installed it ourselves, with a lot of help from our in house data processing folks.

I put in two rules:  we will use the software package from the vendor with standard settings and standard forms, standard input and output.  No customizing until after we were operational.   Second rule:  no changes in the input forms or interfaces from any company department requesting payments and no change in output formats (accounting coding, output reports, timing, etc).  This new accounting software would be a black box to the user departments.  They would send in what they always did, and the accounting department would send back the same data it always did.  All of the burden to make the software work would be borne by the accounting staff.  I told them once it was operational, we would customize it all anybody wanted.

We were operational January 1.  Six weeks.  Unheard of.  One thing happened that I thought might, but was not counting on.  I thought that once the staff began using the software with standard settings, when it came time to customize, they might not want to.  I was right.  Once they learned the standard package, they were content.

What does this mean with current accounting, ledger, processing and reporting systems? All too often the users demand massive customization up front.  That is expensive and time consuming.  The logic is, if we are going to suffer through this system conversion, we best make it do what we want, because we don’t want to suffer it again.  I think that’s the wrong approach, and my experiences have borne it out.

It is often best to take up the software package using standard set ups.  They are built to be easy and cover most needs.  Once operational, customized changes can be done in an orderly and modular way.  What really happens is the users do customize, but not as much as you might expect. 

Standard accounting packages like QuickBooks and Peachtree all come with preset financials, charts of accounts, invoicing forms, etc.  I recommend clients start with the prepackage and customize up front only the bare minimum.  Get used to the system.  Then make it fit like a glove to your unique company.  You will be surprised how little needs to changed. It is the easiest and cheapest way to start with a new system.

Physical inventory taking can be expensive, time consuming, and if not done right, unpleasant.  See above.  For mid market companies like my clients ($2 million to $20 million in revenue) it often seems like a waste.  Even if the banks don’t require it, you should routinely take physical inventories and compare with the accounting records.

First, it is a good check on the plant or store personnel.  If never checked, people tend to get sloppy, if not fall in to outright theft.  If they know you will check, behaviors change.

Second, it is critical to find out if the accounting system, which tracks quantity and price, is accurate.  Much of the time it is not, and it is the accounting system that is in error.  One of my clients bought several hundred thousand dollars worth of precious metal that was used in its manufacturing process.  Three weeks later they took a physical inventory.  We compared the result with the newly designed accounting system (I had designed it).  We were off more than $30,000 (10% of the entire inventory we had purchased), in less than a three week period, during what was generally a low volume cycle.  Either my accounting system was horrible, we did not acquire as much metal as we thought, somebody stole, or the counts were poorly done.  The owner personally did a recount and reweigh of the metal.  Indeed, the physical inventory was not counted right.  Good news for my client because there weren’t $30,000 in losses, real good news for me because the accounting system worked, bad news for the guys in the plant. 

Third, when you take physical inventories, it credentials your management and stewardship.  That’s critical to the bank.  One of my clients and I personally conducted a physical inventory on January 1, New Years Day, in below zero weather.  We counted hogs and newborn pigs outdoors and in their crates.  The livestock secured the farm loan.  We did not have to take an inventory on January 1, in that horrible weather.  But, the fact that we did it personally, and had it audited, was an important validation of our stewardship for the bank.

Last,  it does not have to be all that expensive and time consuming.  Plan it out, take the physical when quantities on hand are seasonally low, count and price accurately, and call it a day. 

Then go fishing.

Since it is tax preparation time for most of my clients, I thought a little tax story might lighten things up.

True Story:  Some years ago one of my clients was undergoing a routine IRS exam.  There were issues involving LIFO inventory, manufacturing costs, allowable deductions and the like.  Routine stuff.

Now picture a long narrow conference room, with a large picture window running the length of the room.  You have seen these hundreds of time.  I am at one end of the table.  The IRS agent is at the other end.  There were four of my staff accountants, two on each side of the table, between me and the IRS man.  Papers and folders strewn all over the table.

My client’s controller walks by the conference room, looks in, sees me standing up,  pointing at some papers and yelling, literally yelling across the room, at the IRS agent.  My client, looking in and hearing  clear loud yelling, seeing me gesturing at papers and pointing at the IRS man,  was panicked.

My client interrupted, fear on his face, and pulled me out of the room.  He was very, very worried.  Why was I yelling at the IRS agent?  I told him not to worry.  We had just settled the last issue, with no changes to the tax returns.  He could not understand.  How could yelling at the IRS agent get us a no-change exam result?

I would not advise yelling at the IRS man.  Cool, calm interchanges are best.  But not this time.

We received a no-change exam result because we had done the accounting and filed the tax returns properly.  The yelling?  The agent had asked me to speak as loudly as I could.  You see, he had hearing trouble in both ears.  He wore dual hearing aids and had a device to amplify sound in addition to the aids.  He was a very capable agent, just could not hear well.

Needless to say, my client was relieved. 

What’s the point? 

You can yell at the IRS, if requested, but make sure your positions are correct.

FOR IMMEDIATE RELEASE

MEDIA CONTACT

Ania Kubicki

ANGLES Public Relations

480-656-8388 

E: b2bcfo@anglespr.com

ADVICE FROM B2B CFO FEATURED IN

WALL STREET JOURNAL’S COMPLETE SMALL BUSINESS GUIDEBOOK

B2B CFO, the only CFO services firm featured in the book, quoted in Chapter 9 “Handling Your Company’s Finances”

Phoenix, Ariz. (BUSINESS WIRE) DATE—The Wall Street Journal’s Complete Small Business Guidebook, published on Dec. 29^th 2009 by Random House is quickly climbing the charts of most popular reads.  B2B CFO, the nation’s largest CFO firm that exclusively services the needs of small and mid-size businesses, was featured along with other leading national resources in the 258-page book.  

Author Colleen DeBaise, who currently serves as small business editor at The Wall Street Journal, turned to B2B CFO for insight on cash flow strategy for her chapter on “Handling Your Company’s Finances.”  In this chapter, DeBaise discussed cash flow projections and operational finances and included a sample chart frequently used by B2B CFO Partners that outlines how to prepare and what to do to survive budget deficits.  

DeBaise pulled from key experts in the nation to bring together best practices when starting a small business.  “From writing business plans to creating exit strategies, we pulled advice from key experts to bring our readers a comprehensive resource,” said DeBaise. 

“Being included in this high-profile resource for entrepreneurs was a great way to round up 2009 for our firm,” said Jerry L. Mills.   In January 2010, B2B CFO has grown to 146 Partners across 39 states.  Each Partner is a seasoned financial executive who serves as CFO to growing businesses on as-needed basis.  Together, B2B CFO Partners work with more than 500 businesses in the nation with combined annual sales of more than $5 billion.   Now in its 22^nd year, B2B CFO has experienced steady growth and emerged as the leading resource providing CFO solutions to small and mid-market companies.

Serving as CFOs to hundreds of clients, the B2B CFO Partners know first-hand the challenges that business owners face when it comes to operational finances.

“Small and mid-size business owners regularly turn to B2B CFO’s Partners for advice on finance and cash flow,” Mills said. “Cash is the bloodline of a business, and having a firm grip on your company’s finances is the key to growth.”    

Mills and many of the B2B CFO Partners regularly dedicate time to educate business owners on financial matters.   Mills is a frequent speaker and contributor and has been featured on many national media networks including FOX Business, Fortune Small Business, Smart Money and many others.  Mills is also the author of The Danger Zone - Lost in the Growth Transition, and Avoiding The Danger Zone – Business Illusions, both business non-fiction books that help entrepreneurs understand and build a strong financial strategy.

 “We’re excited to be featured in the Wall Street Journal’s Complete Small Business Handbook and to continue helping entrepreneurs turn their dreams into sustainable, growth-oriented companies,” added Mills.  

The Wall Street Journal’s Complete Small Business Guidebook is listed at $15 and is available online at www.amazon.com. It is also available as an eBook, formatted for mobile devices.

ABOUT B2B CFO^®

Headquartered in Phoenix, Ariz., the firm was founded in 1987 by Jerry L. Mills. B2B CFO^® is the nation’s largest CFO firm serving entrepreneurial, growth and mid-market companies with revenue under $75 million.  The firm’s partners have an average of 25 years of experience and each individual partner is a senior level executive with a broad range of expertise.   Please visit online at www.b2bcfo.com

###

Note to editors:  high-resolution image of the headshot is available upon request.  Interviews, press materials, and any additional information can be obtained by emailing ania@anglespr.com 

It wasn’t mine either.  “This is not my first rodeo” is a quote from one of my clients.  It is a quote worth remembering.  Here is the context:

My client is a 50+ year old manufacturer of metal components.  They supply components for large turbines, locomotives, and diesel engines.  You get the picture.   They are highly influenced by the economy.

As the economy tanked in late 2008 and well in to 2009, their volumes collapsed.  The good news about that was that my client, having been through every recession since the ‘60s, is very financially conservative.  They carried virtually no debt.  So, for us the problem to solve was cash flow deficits as far as the eye could see.  But we were not being pressed by lenders.

We began taking all of the routine steps.  We scaled back the factory hours to 4 days, with 8 hours scheduled work each day. We laid off plant employees.  We cut office hours.  We laid off staff.  We reduced expenses:  supplies, computer equipment, travel, advertising, insurance costs.  You name it, we tried to reduce it.

We went from a monthly cash flow deficit in the mid 5 figures, to essentially cash flow break even.

And here is when we got the quote:  We were in an executive meeting, in a rather self congratulatory mood, discussing our successes.  The owner, who was sitting  back calmly listening and nodding in agreement, took his feet off his desk, leaned forward and said:  “Very good, but this is not my first rodeo.  We are not done reducing the expenses. I want bottom line profitability.” 

Everyone had become somewhat satisfied with the efforts we had made in getting back to cash flow break even.  And of course that is critical.  But the owner had been through these economic cycles before.  It was not his first rodeo.

We cut more.  The manufacturing plant was cut back to 3 days, with 11 hours each day.  Not having to start up the plant saved enormously on utility costs.  Where the belief was that we had cut the overhead costs in the office all that we could, we laid off 20% more staff. Those remaining had to pick up the slack.  Office salaries were reduced for those still working.  We staggered the office hours so we could maintain customer service.  But, we cut expenses more.

And then we laid plans for what to do next.  In particular, we laid out a plan to consolidate all of the manufacturing work still remaining into a much reduced foot print, which would save even more in electric and gas expense.  Just in case things got even worse.

It was a rough ride.  We got bucked off a lot.  But, the executives, the management, and the staff kept getting back up and back on.

We became monthly cash flow positive, in the low 5 figures, even at 60% lower volumes. And we are profitable, creating a “cushion” should volumes turn down even more.

One of the senior executives had the most telling perspective, once we had achieved cash flow positive.  With a sigh of relief she said to me:  “It’s not good news [the low sales volumes], but we can survive at this level”. 

It was not the owner’s first rodeo.  It wasn’t mine either.  But for most of the executives and management, it was their first rodeo.  Next time they will be better prepared.

This is not my first rodeo!   A phrase worth remembering.

My first audit, fresh out of Notre Dame, was Steak n Shake.  At that time Steak n Shake was a 120 store restaurant chain in the Midwest.  This was 33 years ago, just for context.  I was selected by the senior auditor on the job to assist her with the audit.  She chose me and one other (he is now CFO of a very profitable publicly held software communications company) to go with her from Indianapolis to the corporate accounting offices in Bloomington, Illinois. 

Why me?  My father was a CPA and had me keeping books for a couple of his clients at age 11.  Back then, that meant manual sales journals, manual cash disbursements journals, and manual ledgers.  No excel worksheets.  No computers.  Mostly an adding machine.  I could, and still can, run a 10 key adding machine better than anyone, with either left or right hand.  And that’s why she chose me to work on the audit. 

Let me set the scene for a moment, and I will get to my point.  Steak n Shake had 120 stores.  All of the accounting was manual, as it was for all companies back then.  IBM had not yet invented the PC, and Bill Gates was still in grade school.  The Steak n Shake corporate accounting office consisted of 30 ladies, yes, all ladies, and one controller.  The controller had his own office.  The bookkeepers all worked in one large room, upstairs, above the warehouse and supply kitchen for the Illinois restaurants.  No cubicles.  Rows and rows of desks. Just a metal desk, an adding machine, and one lady for every 4 stores.  30 bookkeepers all seated in rows, 2 desks wide, 15 rows deep.  For each store, she kept a sales journal, a cash receipts and disbursements journal, a fixed asset register and a general ledger.  And there was lots of accounting paper, the stuff with the columns and the little squares where you hand wrote the numbers.  You have seen old pictures of company offices, just like this. Rows of clerks and bookkeepers, with an adding machine (or a comptometer), hand writing letters or hand posting the books, thick black ledgers and journals. Usually a lamp on the desk, sometimes a black rotary dial phone.

My job was to use my 10 key adding machine skills to add and re-add all of the worksheets that the ladies prepared every month, that they gave to the controller, who prepared a consolidating workpaper for the balance sheet and the income statement.  120 columns wide, one column per store.  It was a 6 foot wide set of worksheets.  I am not kidding: six feet wide, every month, 120 stores.  Prepared in pencil so mistakes could be corrected.  No delete keys back then.  My job was to re-add the numbers, by hand, to make sure they were accurate.  You should have seen my fingers fly on that adding machine.

What’s the point, other than nostalgia?  The point is that the accounting task for the 30 ladies and controller was to prepare accurate numbers for every store, and combined totals for the senior management.  Basic, double entry bookkeeping, every month for management, every quarter and year end for the public shareholders.  That is still the task today.  Accurate numbers that have to be checked, and rechecked, so they are useful to management and owners.

The only difference today is that with computers, the numbers can be compiled more quickly (although not more accurately in many cases).  I tell my clients that all we seem to have accomplished is that we can make the same basic accounting errors really, really fast.  Inaccurate account coding, basic bookkeeping mistakes, incorrect account reconciliations, and sheer tardiness are still problems for most companies today, especially smaller and mid size companies.  At the end of the day, the basic numbers still have to be accurate, they still have to add up, and they still must be checked.  Only then are they useable for the managers, the owners, and the bankers to make sound business and cash flow decisions.

I find much of the time that the first task I have with a new client is not to evaluate the cash flow, nor try to find ways to improve it, nor begin working on margins, capital structures, forecasts, etc.  The first task much of the time is to get the numbers right.  In the case of Steak n Shake, they were already getting the numbers right.  My job as the auditor was to confirm it.  For my clients now, the first task is sometimes still to help them get the numbers right.

By the way, the Steakburgers were really good in Bloomington, Illinois at the headquarters 33 years ago.  They are still really good now.  I ate at a Steak n Shake in Indianapolis last week.  Thanks for the memories.

Lenders have a number of ratios and formulas they use to evaluate credit applications, to set ongoing debt covenants, and to review renewals.

I find two of them are most critical.  They are intertwined, and if you can meet them, the rest of the covenants and ratios tend to take care of themselves.

First ratio:  Debt to Earnings.  More specifically this formula would be total debt divided by earnings before interest taxes, depreciation and amortization (EBITDA). 

There are refinements to it.  For example, if the company routinely carries high cash balances, they can be used to offset the debt in the formula.  But, that’s not usually an adjustment made for small and mid size companies, because cash balances are usually pretty thin.

Most mid market companies are either subchapter S or LLC companies under the tax code.  So, the company does not pay taxes.  But, the bankers will want some acknowledgment of the distributions necessary to the owners to pay their personal share of the taxes.

And, the earnings number in the denominator needs to be reduced for capital expenses (CAPX).  An easy assumption is that depreciation will equal CAPX, so no adjustment for either in the formula.  But, if CAPX is much different than historical depreciation, it needs to be recognized.

There are a few other tweaks that can be made to the ratio:  annual minimum property tax payments, rents, lease commitments, and some others, but the big ones are the debt, the projected earnings and depreciation.

What’s the target?  One senior commercial lender recently told me his bank’s range for this ratio was 3.0  to  3.5.  Meaning:  the ratio of debt to earnings should be no higher than 3.0 to one, but must not be higher than 3.5 to one.

Second ratio:  Fixed Charge Coverage.  This is EBITDA (same number as in the first ratio, so you can see how interrelated they are) divided by next year’s fixed charges.  The fixed charges are interest, principal reductions on installment loans, and maturities.

Again, some adjustments to the fixed charges may be needed, like CAPX, minimum repairs above routine maintenance, taxes, leases, and so forth.  Each client is a bit different, depending on their business model.

Maturities in the next year can really cause this ratio to fall, especially lines of credit, so some adjustment is typically made to recognize that the routine lines of credit for receivables and inventory are rolled over. 

What’s the target?  Same banker said 1.0 to 1.5.   So, the bank would like to see the ratio above 1.5, but it must be above 1.0.  As you can imagine, losses ruin both of these formulas.

An example:  Total debt $1,000,000.  EBITDA of $350,000.  Fixed charges (interest and principal maturities) of $180,000.  The debt ratio is thus 2.85 ($1 million divided by $350,000) and the fixed charge coverage is 1.94 ($350,000 divided by $180,000).  Targets met.  But, if you move the base numbers just a bit, you can see how quickly the ratios change and blow the targets.

From time to time, depending on credit conditions, banks move these targets around.  But, the interplay continues because interest and principal payments in the fixed charge ratio are driven by the debt balances, and both the debt ratio and the coverage ratio include earnings in the base.  To improve these ratios, earnings need to be higher, debt levels lower (typically meaning higher equity in the business) and interest rates lower.

They are two good ratios for any business to monitor.

How do you fix accounts that don’t balance?  Where do you begin with a checking account that hasn’t been reconciled accurately in years, literally?  What do you do with a system spitting out rejected checks from customer authorized direct payments and the staff can’t keep up?  How do you deal with an inventory costing system that shows an inventory shortage every time you take a physical inventory?

Fix it backwards.

Example with the checking account:  Reconcile the bank, best you can today.  Don’t try to re-audit the prior transactions.  Start now and work backwards.  Balance per the bank today, plus deposits in transit that we know about today, minus outstanding checks that we are confident about (meaning we know they have not cleared and they are less than 90 days old).  What is the calculated balance that the books should show?  What do they show?  What is the difference?  Do the same task next day.  Find out what cleared that we had no idea was still outstanding.  Find what checks or automatic bank draws occurred today that we did not know about.  Post today’s transactions.  When the difference between the reconciled balance and the book balance is the same number for 5 straight days, you are done.  Book the adjustment.  What you did was work current data, current transactions, current bank activity only.  Any old stuff is irrelevant.  But, doing it this way, if old stuff shows up (like old outstanding checks you didn’t know about) now you can catch them.

My favorite:  the company I served as CFO was drawing pre-authorized bank drafts from customer accounts every month to pay their monthly bill.  The data system was rejecting hundreds of the drafts every day, because the bank would not accept them.  And the number was growing.  We literally had a room full of rejected bank drafts.  We had two staff people available to fix this. And we had hundreds of unhappy customers.  How to fix?  Backwards.  We had already lost any goodwill with the prior customers.  And we could not keep up with the ever growing number of rejected drafts.  Why not?  We would draw the payment, but if the customer had changed banks, or the amount of the payment was supposed to change (that happened a lot) and it did not match the pre-approved draft, then the transaction rejected.  The systems were so far behind that the staff was working transactions more than 6 weeks old, and working forward.  But, at 4 weeks, a new draft was drawn.  The older one had rejected, so did the new one.  Now we are further behind.  Solution:  Start with today’s rejected drafts, fix all you can (we could fix about 200 with the 2 people we had, 300 were rejecting).  Stop and set aside whatever you did not get done today.  Forget about them.  Work the ones that come off tomorrow, all you can, as fast as you can, then stop.  Start again with today’s rejects.  And so forth.  We were working from the current activity backwards, rather than trying to start from all of the historical transaction problems and bring them forward.  In this case, it took about 6 weeks before the number of daily rejects fell below the number we could clear.  Within a couple of weeks after that, problem solved.  We fixed it backwards.

Inventory:  When the physical inventory is always way off, there is either theft (sometimes) or a lousy accounting and manufacturing system (mostly).  Start with now.  Pick a few items and investigate the cause of the current shortage.  Is the raw material, to work in process, to finished goods, accounting accurate at standard cost?  Pick a few products or assemblies and fix them.  Then do a few more.  Work backwards.  The shortages will gradually reduce.  Then figure out which products are priced wrong, based on the now better cost data.

If there is no way, no staff, no records, no idea how to bring forward the historical accounting or transactions to current, then start from current activity and work backwards.  It works.