Issue link: https://read.dmtmag.com/i/592917
www.PowersportsBusiness.com SOLUTIONS Powersports Business • November 9, 2015 • 29 Checks and balances are key for protection FOLLOW ME Checks and balances. How important are they? Impor- tant enough that this entire article is devoted to them! I have compiled a list of checks and bal- ances every serious dealer should have. Some of the items on here may seem ridiculous, but are absolutely necessary for the protection of you and the employees. Over the years I have experienced the benefit and destruction from each one of them. To better understand the "why?" behind the recommendation of what to do, I will offer examples and scenarios that you would likely come across. When putting these to-dos in place, be cau- tious in how you carry them out. Many people will be sensitive to the changes and wonder if you trust them. Explain to your employees that it's not so much about trust as it is about every- one's protection. In all the positions I have held, I wish someone would have educated me about these things I'm about to share. Not only do I have dealership experience with these, but I am guilty of some of them too. I was unknow- ingly guilty, but guilty all the same. PAYROLL To Do - The same person should not be involved with hiring, terminating or promo- tions and processing payroll. Why? Entering a promotion/raise into the system could lead to giving someone a higher raise then they should have, maybe even them- selves. It all comes back to the pay rates. To Do - Time sheets or other payroll data (com- missions, bonuses, etc.) should not be approved by the same person who processes payroll. Make department mangers approve their employees' payroll information and commis- sion. Monitor overtime being paid. Check for fictitious employees in your payroll and if any edits are being made to the checks or the taxes. Why? Many of these involve pay rates. Are they correct, or are they not? As the payroll processor you might not know, or again, you may factiously enter a commission. Is there a fictitious employee someone is trying to process? This happened to me when I was a controller. One of my staff members tried to get away with a fictitious employee. They also tried to change information, so the stub had different information than the check. In some systems, the check might say one thing, while the stub says something else. To Do - Someone other than the person processing payroll must approve all payroll tax filings. Why? This one is crazy. Who does not file payroll taxes? I have seen the devastating effects this can have on a dealership. One deal- ership I knew of, and I am sure there are many more, had to close their doors because of not filing. Unpaid taxes, plus fines, fees and inter- est, can be devastating to a business. ACCOUNTS PAYABLE To Do - The same person should not be allowed to make purchases and also process accounts payable. Why? This is a big issue. There have been too many cases where the same person is the purchaser and accounts payable person. An employee could easily purchase personal items with company money. This is easy to do if you do not have controls in place. To Do - Owners and general managers must monitor accounts payable. Be sure to check the following: Missing discount dates Flooring payoffs that are late and causing interest payment Extra per diem on lien payoffs Late payment penalties or interest Why? The dealership can lose a ton of money by not taking discounts, paying off floor plans, trades in times and more. To Do - Require purchase orders and match them with receiving documents and invoices. Pay only for what was received. Why? If you are just paying for things as they come in, without verifying you received them, you could be paying for items never received. To Do - Watch for the fictitious invoice (copier toner, yellow pages advertisement, etc). Why? They continue to bill you as long as you keep paying them. Not only that, but they will ridiculously over charge you! ACCOUNTS RECEIVABLE To Do - The same person who is responsible for tracking receivables should not be the one processing payments. Why? The employee could show their personal account or their buddy's account as being paid off when no money was actually paid. To Do - Monitor your accounts receivable. Know who is current and who is past due. Why? AR is a nice place to hide dollars, if the accounts are not being monitored. And your aging can become extremely high. I worked at a place years ago that, when I arrived, the AR aging was at 45 percent. By the time I left it was down to 2 percent because I took the time to work on it and collect the money. If an account goes uncollected for 30 days, the chance of col- lecting that money drops drastically. To Do - The same person who is responsible for tracking receivables cannot open a new account. Why? Simple. They could open fraudulent accounts. BANK ACCOUNTS & CASH HANDLING To Do - No one person handles cash from beginning to end. The same person who is responsible for receiving cash cannot also make bank deposits, and the same person making bank deposits cannot reconcile the bank statement. Why? If not, there are no checks and bal- ances. The person counting the cash sends the money to the accounting department for verification. If the person doing the deposit makes a different deposit, then you can ask "Why that would be?" The person doing the bank rec can reconcile the false bank deposit. It can be a vicious cycle. I understand that sometimes it is really hard to do this as many have small shops, but do as much as you can. You will benefit from the separation of duties and maybe even uncover something. To Do - Have a fixed starting point on all cash drawers. Why? Easier to reconcile and stay on track. I would recommend that every once in a while you throw in an additional $20. If that goes missing then you know something is up. To Do - Use numbered customer receipts and account for each number. Why? Question any missing receipts. They should all be there. Most of you have a com- puterized DMS that does this for you, but there are still people who do not. To Do - Approve the bank account reconcili- ation. Make sure last month's number ties to this month's number. Have a copy of the bank statement sent to your home. Why? This is for your protection. If the num- bers from month to month are not reconciling, then bells in your head should be going off. BANK ACCOUNTS & CASH HANDLING To Do - The person who is writing checks can- not also sign those checks. Why? Huge! Can they write a check to themselves? Yes. Can they write a check to a buddy? What about petty cash? It is scary all the things that can happen. To Do - The same person who signs checks cannot reconcile the bank statement. Why? Again this prevents fraud. If someone is writing checks and clearing them in the bank rec, no one will know. To Do - Eliminate signature stamps. Why? They're too easy to use. If you use a stamp, require two signatures on all checks. To Do - Use pre-numbered checks and account for each number. Keep the checks under lock and key. Why? Safety and security. Just another checks and balance item. To Do - Review documentation before you sign a check. Make sure you look for ficti- tious employees in payroll checks and check to see that you're not paying someone else's electric bill. Look for something being hid- den in long-term debt or other accounts that you don't review regularly. Be sure to moni- tor the payroll reports and justify the check amount, seeing if the previous balance was paid in full. Why? This should be self-explanatory. And if you are not checking, fraud and theft is going to happen. You left the door wide open. GENERAL LEDGER To Do - Require balance sheet account rec- onciliation. This item is cost effective and really gets to the core of what this is all about — accurate financial records. At the very least review key accounts (AP, AR, inventory, deposits, cash). Why? You should know if your accounts are in balance or not. What is happening with them? Why are they out of balance? Too many times I hear, "My accountant knows what he or she is doing." Many times we find out they don't. To Do - Require financial statements by the 15th of the month along with the detail. Be sure to review them. Why? There is no reason to not have financials immediately. I would prefer saying the 5th of each month. Remember it does not matter what month a bill is booked in once you are in the new month. What matters is consistency. If you are consistent, you will see patterns; when you are not, things will be all over the place. Some items will end up in the same month twice, and the next month has nothing. Consistency is what you need. MISCELLANEOUS To Do - You (the owner) should open the mail. If that is not possible, then the mail is opened by two people. Why? I never got this one, until one day it happened. The owner did not open the mail. The accountant would run in before he got to it and remove what she "needed" to have. The owner found out that the payroll taxes were not paid. She did not want the owner to see them. Review all mail. To Do - Hire good help. Make sure to read the resumes of potential new hires. Always make sure you conduct background checks Why? It is a smart practice to know who you are hiring. To Do - Provide adequate training to your employees. Remember that internal controls are also about efficiency, not just preventing fraud. Training will help catch that costly mis- take. Be sure to cross train so jobs aren't sitting unchecked while people are out of the office. Why? Proper training is typically the first thing to be forgotten. It amazes me! Provid- ing the right training can help prevent some of the things above. Always have a backup for someone, otherwise that person "who knows it all" thinks they are invaluable. They get careless and know that they will not be let go because the dealership would be in a bad place without them. To Do - Make sure you know everyone who has access to credit accounts for the dealership. Better yet, try not to have credit accounts and simply pay by check. This would include all company credit cards, PayPal and eBay accounts, and open accounts with local suppliers. Why? It is easy to review open accounts and to know when they are being paid. Always review credit card statements on all your accounts; from bank accounts, to AP and AR. Ask your employees questions, even if you know the answer. By doing this, employees know you are looking at the information. It is your finan- cial information and, at the end of the day, you are responsible. OVERVIEW Here is a great example of hiring the right people for the right job. I called a dealership to speak to the owner. The person on the phone was the bookkeeper and was defen- sive because I would not talk to her. I only wanted to speak to the owner. The owner has no idea that this person he has put in charge of his accounting was having issues. They would call into Lightspeed Support multiple times a day and was struggling to keep their head up. This individual claimed to know accounting, but it was very clear they only knew data entry. Changing your processes can be difficult. But these processes are put into place to pro- tect the employees and the owners. It is impor- tant to explain to personnel why these are being put into place. The better understanding your employees have of the "why," the better the result. Be careful not to put all your eggs in one basket. Once one egg cracks, the others will drown. PSB Paula Crosbie is the training development manager with CDK Global Recreation. She has been training and consulting with powersports dealers for 13 years. She can be reached at paula.crosbie@cdk.com or 801/519-7570. PAULA CROSBIE