“In his expense report, one of our senior consultants has requested reimbursement for a couple of drinks that he purchased on his Amtrak trip back from a customer visit in NYC last week. Do we pay for that or does he?”
I had a sense that the Controller was handing me a can of bayou worms in her email message to me last month, so I wrote back to ask what this (new) client of mine had done in the past about this kind of expense. The T & E policy stated only that “employees traveling on company business will be reimbursed for reasonable expenses incurred in transit and shall make every effort to minimize costs to the company and/or its clients.”
“Well, it’s never really come up,” she said. “No one has questioned it, so I guess that we’ve always just paid it.”
This got my controllership juices flowing. “Identify and control” – the Controller’s Mantra – flashed through my mind. I churned out an 18-point policy memo overnight recommending daily meal limits ($60-75/day), approved transportation modes (the MBTA is often an efficient, money-saving option), porterage (hard to justify using a bellhop for carryon luggage), and such.
The memo sat for a week. I began to rethink it. For the most part, these are mature, experienced employees traveling for my client. Through stock or bonuses, they all have a stake in the business. The Controller can provide guidelines in an effort to get everyone on the same page, but at what level should she police it? Similarly, at what level should she require justification for every organizational membership, every subscription, every conference or meeting for which employees request approval?
In most small companies, the appropriate level of control comes from comparing the month’s actual results vs. the budgeted amount in each expense category to understand why variances occurred and then communicating the result to the responsible manager. Assuming (which is always dangerous!) that every account line was considered in some detail during a Company’s budgeting process, often the difference results from a time-shift (‘We got a good deal, so we purchased the item a month early”), or a simple budget oversight.
Going through every receipt in an employee’s expense report to confirm that it matches the reported expense, or asking a manager to justify spending $30 on an occasional pizza lunch for his work group is hardly the best use of anyone’s time. If a manager is capable, he or she deserves some latitude in committing the company’s funds within a reasonable budget. If they’re not capable, they shouldn’t be managing.
By the same token, don’t encourage your motivated, energetic accounting staff (!) to play “gotcha” at the expense of the other employees in the company. Give them analytical assignments that add to their fellow employees’ understanding of how the company works. The point is to encourage cooperation across the organization. Avoid becoming confrontational unless a manager or a work group is clearly abusing the budget.
I modified my reply to the controller. I sent my 18-point memo to her as a guideline, not as a requirement, and I went on to say that tight control of S, G, & A (Selling, General & Administrative) overhead expense – to the point of questioning employees’ integrity – is penny-wise and pound foolish in smaller companies. If expense guidelines are observed by senior management and effectively communicated to the staff, honest employees will fall in line. The dishonest ones will go underground, ultimately to be discovered on the basis of something other than a padded expense report.
Alligator Bites
The lead article in last month’s issue of Howe’s Bayou, “Banking Basics 101,” produced significant commentary, none more telling than that of Neal O’Hurley, Senior Vice President and Chief Credit Officer of Boston Private Bank & Trust Company, who wrote in an email message:
“Your observation on how banks staff their commercial lending front line is right on target. The old credit-trained commercial loan officer is unfortunately becoming extinct. This trend is most unfortunate for the smaller business owner who in the past relied on a banker with good business/credit sense as one of his key advisors. Not that all bankers provided this service, but many did, and some were outstanding in this role.
“Now, as the banks continue to replace their front line ranks with sales reps who are trained with just enough knowledge to sell every product that bank has, that critical link between the bank and business owner has eroded significantly. The larger banks have led the charge with this model, as you know, in the name of increased sales and efficiency. From a pure P&L standpoint, the model can and does work. Sadly, the hidden cost is a more superficial relationship that was started by a sales rep (who is incented to run out the door right after the “sale” to the next guy across the street to tee up the next sale). A banking relationship such as this has little roots.”
At the same time, the changing credit environment also results in the following:
An article in Chief Executive magazine quoted Ed Kopko, chairman and CEO of Butler International, a global provider of technical and technology services, as recounting a conversation with a private equity investor about the investor’s attempt to finance the growth of a portfolio company that had won a new contract. The company – which was profitable – needed cash to fulfill the additional orders, but its bank not only refused to extend its credit line, but also wouldn’t permit the private equity firm to invest new capital. “He was told, ‘Any funds that you get from the outside must go toward paying down our loans, you can’t use them to run your business,'” said Kopko. “In the end his only option was to pay the bank a large fee to waive the requirement that all the funds be applied to existing loans. He had to pay for the right to invest his own money in his company.”
Draining the Swamp
Minimum number of U.S. homeowners whose banks improved their mortgage terms in the first quarter of last year: 73,000
Percentage of them who were a month or more behind on their payments six months after the relief: 55%
Number of months since record keeping began in 1947 that U.S. consumer prices declined as steeply as in November 2008: 0
Last year in which total world trade shrank, before it did so in 2008: 1982
Minimum per-capita debt that Iceland owes to foreign depositors as a result of its banking collapse: $19,100
Per-capita reparations required of Germany in the Treaty of Versailles: $2,400
– Source: Harper’s Index, March 2009