September 2004 In this issue:
Welcome!

It's the end of summer. I'll be brief. This newsletter is a way of keeping in touch with you. It's a quick read. The concepts are simple, but important - especially when they're overlooked.

There are lots more "simple truths" in the financial area that I intend to write about in coming months. Let me know what you think about this and subsequent issues, especially if you're in search of simple truths, or you've discovered some of your own.

Or write back simply to let me know, Howe's Bayou?

Best regards,

Bradlee T. Howe
Financial Managers Trust

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I Used To Work With A Crook

I used to work with a crook. Carole wasn't your ordinary crook. She was a crooked accountant.

Carole was conservative and modest, thorough and meticulous, timely and accurate - all the qualities you'd want in an accountant. It turned out that she was also devious.

She started out small: my client, the owner of an established retail company, regularly went off on buying trips and left signed blank checks behind for emergencies. Somehow there always seemed to be emergencies, and Carole made certain that the occasional check that she wrote to herself got lost in the shuffle.

The signed blank checks were never inventoried, and Carole explained gaps in the check sequence simply, "I made a mistake in writing the check and just ripped it up."

Then she got more aggressive, and more creative. Every week she produced a run of accounts payable checks, which the owner signed and returned to her for mailing. "Borrowing" an occasional A/P check in the amount of several thousand dollars, she would paste a removable strip with her name on it over the payee's name, and deposit it in her own account, typically with other legitimate checks to her, making sure that the "strip" job was neat enough to be overlooked in processing.

Knowing that the vendors would soon complain about non-payment, Carole employed several stratagems to cover her tracks.

Sometimes she'd simply double-pay an invoice, making sure that the payments on the books were separated by at least a month.
On other occasions, she'd arrange to ship the product back for credit against the invoice she had already paid (to herself). A third tactic, with a vendor who simply dropped off his product and didn't bother with a receipt, was to claim short-shipment and request a credit equal to the check that Carole had just paid to herself.

The Company was struggling when we came aboard, having been introduced by the landlord, a friend of ours.

Our first recommendation, as it is for all of our clients, was to have the bank send its monthly statement directly to the owner, at his home. We know that more than 90% of fraud in smaller companies can be preempted if the perpetrator can't get first access to the bank statements.

To the surprise of all of us, the first set of homeward-bound bank statements revealed Carole's misdeeds, leading to our discovery of fifteen other misappropriations totaling $54,000. Without first access to the bank statement, Carole couldn't remove the tape and cover her tracks.

Instead of jail time, the Middlesex County District Attorney recommended parole and restitution for Carole. Ten years later, she's still on parole, and she's still making restitution, at $200/month. She has a long way to go.

Poor cash control systems almost always invite bad things to happen. Many of the antidotes are simple. Here are five:

  1. Take prior ownership of your bank statements, even if it means sending them home. Open the package and scan the checks, front and back, for anything out of the ordinary.


  2. Resist signing blank checks when you're going to be away. If there's no alternative, be sure to limit your exposure by writing "Not to exceed $5,000" (or another sum) on the face of the check. This is a deterrent, even though banks cannot be held liable for cashing a check.

  3. Never resort to a signature stamp. If you can trust a person with a stamp, you can trust him or her to sign checks in your absence. Every signature thus is "authorized" for certain.


  4. Require two signatures for check amounts above a readily "digestible" loss level, e.g. $5- 10,000. This is another deterrent although, again, the banking system is ordinarily not responsible for intercepting anomalies.


  5. Inquire with your bank about a service like "Positive Pay" (see postscript).

These are my top five. There are others - some more, some less obvious. Do you have one or two to add? Click here to send it along, and if it works, we'll share it next month!


P.S. Deb Larsen and Diane Reilly of Fleet/Bank of America in Worcester, tell me that a recent Nilson report estimates that the banking industry faces more than 1.2 million worthless checks in the banking system each day. To combat this greatly increased incidence of check fraud using desktop publishing programs and laser printers, BoA has introduced its "Positive Pay" system.

After each check run, their customers electronically forward to the Bank a list of the check numbers that they have cut and the amounts paid on each check — a one-minute task with most accounting systems. The Bank will make certain that what gets paid matches exactly with what was supposed to be paid on each check.

Alligator Bites

"The attention level [of the Roslyn, N.Y. public school community] soared several weeks ago when Pamela C. Gluckin, a senior administrator, was charged with stealing more than $1 million in school funds. . .

". . . the district says it believes she funneled some of the money to herself by arranging for checks to be written to companies she had established.

". . . several vendors for the district have disputed the amounts carried for them on the district books. [One of them] said he did not charge the district anywhere near the $65,000 that is listed for his limousine and car service.

"Prosecutors say Ms. Gluckin used the stolen school funds to help finance four homes, a Lexus and other luxury items. The district first discovered missing funds in 2002 but believed, based on an audit, according to board members, that only $250,000 had been taken, so they allowed Ms. Gluckin to resign, citing 'personal and medical reasons' after she repaid the funds. In hindsight, board members acknowledge, the decision was a mistake."

- from The New York Times, June 27, 2004

Brad Howe Comment: In addition to the five basic control elements indicated above, a sixth standard procedure would have avoided Roslyn's loss:

Segregate the duties of invoice approval, check-writing, and bank reconciliation among three different people, even if it means drafting non-accounting people to help in the process.


About Us

Financial Managers helps the managers of smaller companies and non-profit organizations develop reliable financial information for operational decisions.

On an affordable retainer basis, FM serves as the part-time controller and senior financial manager for multiple clients, leading them to profitability and positive cash flow.

The goal is for the organization to outgrow Financial Manager's services, at which time FM will take the lead in identifying and hiring the right full-time financial person for the firm, and effect a smooth transition to his or her management.


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DRAINING
THE SWAMP
"Numbers And Metrics
You Can Use Right Now"

"Generous Electric," my client calls it facetiously, has just changed its standard payment terms to 2.5%/ 15, net 90. They'll now pay their vendors routinely in 90 days from receipt of invoice unless you want to discount your price by 2.5% in order to get paid in 15 days.

Is this a good deal for GE's vendors?

It depends. If you're squeezed for cash, that 15 day payment looks pretty good. But it comes at a price. For every $100.00 you've invoiced, you'll receive $97.50. If you borrowed $97.50 and paid $100 back in 75 days, your simple interest rate would be 12.3%. If you're a decent credit risk, like my client, most banks will lend you money for less than 12.3%.

So, if you're a seller, don't offer terms that give away margin without analyzing what it's costing you. If you're a buyer, you might want to jump at opportunities like the following:

Calculated rates for terms of sale:

2%/10, net 30 =
40.8% annual rate

1%/10, net 30 =
20.4% annual rate

1%/15, net 30 =
24.2% annual rate

1%/15, net 45 =
12.1% annual rate