Sunday, December 5, 2010

Revenue scoping policy

Revenue scoping policy

The press were waiting for the press note on the annual business performance to be released. The release of the press note was delayed because the board had not yet approved of it. The board could not approve of it because the auditors had yet to sign off the balance sheet. The auditors will not sign off the balance sheet because the CFO was still to provide satisfactory clarifications they had sought earlier from the company. Whereas the press was to have got the note at 1100 hrs in the morning, they got it at 6 p.m. after a harrowing wait of over seven hours.

Ravi Ratnakar, Director appointed by the institutional investors was visibly irritated at having to cancel his flight for the night and go the next day morning . He pulled the CEO aside and told him that financial results must be published to him by the 3rd of every Quarter ending month. A delay of 20 days and doing it on the morning of the board meeting was simply not acceptable. The CEO, as if he had nothing to do in the matter, pointed to the CFO and asked the latter to get his act together.

The CEO and the CFO both knew what the problem was but were unwilling to face up to it. They both blamed it on the failure of the quality of the accounting Software that made the consolidation of quarterly accounts very difficult. Ravi Ratnakar was not prepared to be taken so lightly. Upon his return home, he called up the CEO and told him that an auditor friend of his will help them in the matter. Helplessly, the CEO was forced to accept the offer without protest.

Next quarterly board meeting passed off peacefully without any problem. The auditor had very little to do because the CFO, keen to avoid getting exposed, had already managed to address all the problems. How did he mange it this time?

Delay in release of invoices on customers: Usually, in order to show good revenues, the books were kept open for a week after the month got over. Consequently, the generation of invoices too were postponed by as much, flowing into the next quarter as receivables. The is time, it was closed promptly on the last working day. This, quite obviously improved the working capital situation but went down poorly with the customers who were denied the extra time to enjoy free credit.

Doubtful debts not recognized: The collections team likewise, was often given time well past the start of the next quarter to show that the status of accounts receivables were in very good shape. That once again was not allowed owing to the timely closure of the bank books. The amounts outstanding beyond 180 days were clearly highlighted as doubtful debts; each one had a clear status note explaining whether they will become delinquent and if they did, how they will be dealt with.

Delayed release of credit notes: Errors in invoicing and the issue of credit notes for goods returned back unsold was often kept pending. While it looked good artificially in the short term, by the end of the year it reflected poorly on the results of the last quarter. This too was remedied forthwith.

Adjustment of advances: Although the issue of travel advance and timely settlement was a mandated policy guideline, employees had the habit of submitting travel expense statements very late. With over 40 % of the employees traveling for as much as 100 days overseas, the amount shown under loans and advances was inordinately high. Worse yet was that much of it remained under suspense until the true levels of expenses became known much later on. In most cases, the employees had spent in excess of the amounts advanced, reflecting poorly on the cost of operations.

Surprise expenses incurred without prior approval: Although there was a strict guideline on discretionary spending towards unbudgeted expenses, every month, a substantial amount was incurred and justified post facto as a fait accompli. There was very little for the CFO to do except to accept the expense under protest.

Posting delays: All these factors resulted in inordinate delays that allowed very little time for the MIS department to post the vouchers into the system. When the automated MIS system released the provisional reports, there were obvious and glaring omissions and errors that required correction and reprocessing before the accounts could be clearly squared off.

The results of the next quarter were poor. But Ravi Ratnakar knew why. He was happy that his timely threat had resulted in a one time poor show; since all the accumulated problems of bookkeeping disciplines had been addressed, he was not unduly worried. Now that people had owned up to the bad news, he was confident that they will act more responsibly in the future.


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