When it comes to talking about the best accounting practices, it’s easy to focus on the numbers on the page. The numbers are constantly changing and moving, and at some point it’s your job to make sure the numbers end up in the right place. However, if your business carries physical goods and keeps them in stock, your numbers are representing these real physical goods. Just because your numbers end up in the right places doesn’t mean your physical goods have.
Today we’re talking about details. By regularly following a few simple guidelines, you will catch discrepancies between balance sheets, purchase orders, and even your own eyes. Catching these small mistakes can keep your company in good shape, and you in a job!
On this episode you’ll hear:
- Garret Carragher’s firsthand account of a company that lost track of the details
- How to track your GRNI – goods received not invoiced
- Why you need to inspect your stock in person
- The importance of reconciling supplier statements with your records
- How to calculate your profit margin
- A useful way to spot check your inventory
If you keep physical goods in stock at your business then this is one episode you won’t want to miss.
Transcription of This Episode
The Gross Profit Podcast is your one stop shop on the path to profitability. Each week we share authentic advice on the positive, practical steps you can take to make the company you love more profitable. If you’re looking for a positive plan to help you avoid common spending mistakes, control costs, and increase your profits, then this is the place for you.
I am Ryan Cowden and this week we’re joined by James Kennedy and Garret Carragher. In this episode of the Gross Profit Podcast, James and Garret discuss 5 tips to protect businesses that have to keep track of physical goods. When it comes to talking about the best accounting practices, it’s easy to focus on the numbers on the page. The numbers are constantly changing and moving. And at some point, it’s your job to make sure that the numbers end up in the right place.
However, if your business carries physical goods and keeps them in stock, your numbers are representing these real physical goods. Just because your numbers end up in the right places, doesn’t mean your physical goods have.
Today, we’re talking about details. By regularly following a few simple guidelines, you will catch discrepancies between balance sheets, purchase orders, and even your own eyes. Catching these small mistakes can keep your company in good shape and you in a job.
On this episode, you’ll hear Garret Carragher’s firsthand account of a company that lost track of the details. In this story, Garret shares the lessons he learned working at a company that quickly ran into financial problems because of small mistakes in their accounting procedures. Next we’ll discuss how to check your GRNI: your goods received and not invoiced. It’s important to record these items monthly and in an organized manner to maintain an accurate picture of your company’s finances.
Then we’ll cover why you need to inspect your stock in person. Being on the ground and, checking stock with your own eyes helps you catch errors that may not yet have shown up in the numbers. After that, we will talk about the importance of reconciling supplier statements with your records. This simple step takes time but provides a consistent way to catch errors before they become too big. We will also go over how to calculate your profit margins. If you understand your actual profit margins, you’ll be in a much better position to catch discrepancies and odd behavior in your accounting.
And finally, we’ll share one way to spot check your inventory. Doing a mini stock take of your high value items and checking them with your records is a useful strategy for double checking your work and provides extra safeguards around your most expensive items.
If you keep physical goods in stock at your business, then this is one episode you won’t want to miss. There’s a lot of actionable advice in this episode, so grab something to write with because you’re going to want to take notes. As always, I’ll be back on the other side to wrap up any loose ends. So without any further ado, here’s our conversation with James and Garret.
Hello and welcome to the Gross Profit Podcast. It is your host, James Kennedy, CEO at ProcurementExpress.com and I am joined as ever this morning by the secret CFO, Garret Carragher. Carragher, how are you?
Very good James. How’s things today in Malachite? All good?
Life is beautiful here. So, are you not worried that your secret CFO identity will be blown if people just go to LinkedIn and type in Garret Carragher? Are you just counting no one will be able to spell Carragher correctly? Oh, you’d be fine.
Carragher is such an unusual name, that people will find it hard to spell it, but even if they do, they can’t look me up. I’m not even on LinkedIn. That’s how secret I am. I am not on LinkedIn or Facebook.
Ah, very good. Okay. No wonder we can’t find all our customers they’re all hiding and they’re on LinkedIn. That’s where our sales people are looking for you. You can’t play on unfair like that and, hide. Okay, great. So we have definitely what is going to be the world’s most exciting podcast episode about receiving goods and stock takes. Isn’t that right Garret?
Yeah, it is a good one. I have a great story on how not keeping an eye on the details can really cost you money and, maybe even some situations cost you your job.
Exciting. So, how did you come across this? Is this someone you know or is this, on the an urban legend?
He’s not an urban legend. None of the stories are urban legends. James, all personal experience. That’s why they’re so interesting. So a few years ago, I was working in a business and the business, was a large producer of baked products here in Ireland and, the company was growing significantly. They made it huge amount of money and were making par baked products. So that’s products where you baked them a certain level. Then you actually put them into a huge bio freezer, which freezes them down, stopping the baking process they’re then packaged, and sent out to retail units. And, the way the business worked was, they were actually giving believe it or not, maybe not our podcasting, it’s actually give out free ovens to the retail units. Three, two millions were receiving the product. I’m baking in store and then put on the shelves fresh the next day or that morning for the customer.
So this really was an innovative way to produce goods and update products. And of course with any innovation they made a colossal amount of money. So when you make a lot of money, what usually happens in businesses is the like to spend the money. So what are we going to do with the cash? Alright? With the cash, they decided they were going to acquire another business. So as you know, and I’m sure listeners know we always, you always stick to the missing. So they’re not going to go off and buy a technology business. They’re not going to buy a car dealership. They’re going to buy an order baking company. So the one they had an eye on was a business in Wales and the UK. So they went over they did a lot of research. Do you do your due diligence to decide and right, we’re going to buy this business.
Now the way the works in the Irish company was a bit like Kerry Foods. So what they like to do is to train up their accountants in house and then they send the accountants out to any businesses they acquire. The reason behind this is they can leave in the ops on management team who have initially made the business very successful. But by having a financial person in there, if there’s any issues, definitely a person’s loyalty will lie with the Irish company and they’re also Irish as well. And they were call back to the head office and let them know there’s something going on here or something’s gone wrong. So it’s really smart thinking. It’s done a lot by Kerry Foods who are now bring a lot of people into a truly` there and carry, train them up and then send them back wherever they purchase the business be that in America, South America or whatever.
So that actually happened. In this case, the person who to we’re going to send over was a colleague of mine. Really good guy, really smart guy and this was a big move for him. You know Jim, sort of saying this is your big moments. You’re going to go over and be the finance, head finance fellow in this business in Wales and this baking company. The baking company made delicious products. One of them was called was some kind of sausage roll or something. But over he went, things were going great, he was making lots of money as always. So he’s looking at the accounts each month. They’re making good margin, good profits with as a lot of accountants there kind of on a budget. That’s what a lot of accountants do. So someone spends a lot of time, doing up a budget and then each month then they’re really hitting the budget every month.
So I think the budget in this case might’ve been, maybe 100,000 Sterling of profits. So he was hitting send back accounts to the Irish office. You said 95,000, 90,000 whatever. So the watch business, okay was going good, look like a good acquisition. Everything happy days. So six months in, they decided to send another accountant from Ireland over. But anyway, they sent another account over, another fellow I knew quite well. He got a girlfriend, out of it actually so that worked out well for him, a welsh girlfriend. But over he went and the next month the accounts come in and instead of making a profit they were making 40,000 Sterling loss and the month after was making another loss, the minute the lost come in, the FD in Ireland fashion director in Ireland immediately flew over and he flew his whole management team over to Wales to find out what was going on.
So what was going on, what had happened, how did this profitable business they had acquired gone from profit to loss? Well it’s` a very simple thing that happened and it happens to a lot of people, if you don’t keep an eye on the detail, so they had been, obviously they were a baking business, they’d been buying in a lot of flour. Truckloads of flour. Truckload of flour could of been 20 grand a pop. So they’re getting in truckloads and truckloads every week and every day to bake their products to sell. Now what had happened was the store manager hadn’t been receiving in the flour, so the truckload would land in, he wasn’t recording correctly that the truck load had landed in the flour had been landed in.
How? Because the flour was going through so quick through the process and being turned into bake products and out the door. Before he knew it the invoices weren’t coming in quick enough in the month. So suddenly you had a thing where he saddling maybe a million quids worth of products, finished products. But he’s only recording 400 thousands in cost of sales for the flour. But the reality was they had used maybe five or 600 quids worth of flower in the month. So,
so is it that they were just not receiving the flour as it came into the factory or was it they were ramping up and they were using last month’s flower to make this one is profit.
Yeah. So what had happened was they weren’t receiving any flour, so the way they got to pick that up eventually is down the line that we’re getting invoices in from the supplier of the flour. And he was looking for a lot more money and a lot more deliveries than they have recorded. And this is where the suddenly picked up. Hold on. Now instead of getting in at 10 loads of flour for the month, we actually got in 15 loads or 14 loads. Because this was the main ingredient and an expensive ingredients at that. Not recording those extra couple of shipments had a huge effect on the profits.
So it was just down to some bags or deliveries were receipts and some weren’t or was there some other nefarious intent going on to try and make the profit look better and you’ll never know.
Right? We never know. I doubt very much. This was a really good guy. I doubt very much he was trying to any kind of mess and going on unless the MD was trying to pull the wool over his eyes, which might’ve happened, you know, since he was new to the business and we’re trying to report better profits then actually could make in the long-term. But I don’t think he was, you know, he personally was certainly not involved in any kind of fraudulent activities. So I think it really was just a lack of accounting controls.
so, and then how did, I wonder if the company had been bought on the basis of the Phantom profit are the way it really was. Cause it sounds like it was actually a loss making operation or was it just that that they had to suddenly account for all the flour they hadn’t accounted for before which pushed him into a loss?
Yeah, I think you’ve hit the nail on the head there. I would suspect when the business was being sold or counted, you know, for sale, that they would have shown a margin that was attractive to the Irish company to buy them. So it would have shown a margin of 10 15 20% that looked attractive and made sense. But when the reality, when the rubber hit the road is to say maybe they were just at breakeven or maybe just this could’ve been a reason why the company was sold as well. So a lot of blame there for different managers and clearly the people who did the due diligence didn’t really do a good job, I would say as well.
Amazing. I mean because there’s so many different things like that. This is just not receiving everything in properly. It’s quite a small wow, that’s obviously a big impact. But how are you supposed to trust the accounts? You know, is it, there really a lot of trust going into the, look at any set of accounts for a business you’re thinking of buying and there’s all these little things that were probably dozens or hundreds of other little things to catch it in the same way. So now we have the secret CFO’s five step process for making sure this never happens in your companies. Is that right, Garet?
That is correct. So how can we stop this? How can we mitigate the chances of this happening to you or your business if you carry stock. So I have a couple of points here, five points here that I think will really help you to mitigate any losses or any chance of fraud. So first one is your GRNI, so GRNI stands for good, received, not invoiced. So that means you’ve received in product, or received an items, but they haven’t been invoiced to you. Okay. So in that case you need the record that each month and you need to make an accrual for it. An accrual means you need to take in a cost for us in the month. So in the case of the flour, when the flour loads on the day, then it should have been recorded by the store manager receiving in the flour that he received in 10 loads flour in the month.
And when they went up to the accounts department the accounts should see on the system, 10 loads received in then post the invoices indebted invoices sort of too short. So in that case the record, we need an extra, you know, whatever value it is of those two loads. We need those extra costs recorded in the accounts in the morning. So you say, okay there’s two loads, each load is 20 grand so we need to record 40 grand more of cost in the morning and that goes into your P and L in the month and also hits your balance sheet and that’s a crucial part of doing your accounts each month. The second point I would make is it’s important to be on the ground, walk around and see what’s going on. Many, many businesses I’ve been in it’s really when you walk around and see what’s actually happening in reality, did you get a feel for the business?
When you’re doing accounts and you’re sitting there looking at spreadsheets endlessly or an accounts package, you kind of lose touch of what’s really happening in the business. It’s key really just to go around and talk to people, talk to managers, have a walkthrough sort. I walked through the stores at least two or three times a week. Just walk around, did it look tidy? What’s going on? What’s that up there? What’s this box sitting over there? Who’s this one going to? Just have a look around and talk to the people, find out what’s going on. I like a simple thing like that in the example we talked about where he just goes down and maybe talks to the management, says how many flour loads we getting in this week? Are you receipting in them in the system? You know and they walk back up the counter and said to the person posting the invoices, you know, I’ve just been down there.
He said he’d got in 10 loads this week, how many invoices we get and he says, “well I only got 8 and where’s the other two?” Oh well they’re on hold orders. Some problem with the order. I have the wrong PO number. And really following that up and just have no… I kind of an understanding of the business, just kind of a need understanding. When I said I know we do at least 10 loads a week of flour, but I think we’ve only got, you know, six or eight loads recorded, something missing here, something wrong, that kind of feeling you get.
The third tip I would recommend any business to do, and this is a good one for picking up a lot of errors actually. Is to reconcile your suppliers’ statements so your creditors’ statements.
So that means every month you should get in statements from your suppliers, your creditors. They will list all the invoices they have sent you in the month. You need to check your system. Does it tie back to what they are saying? If it doesn’t tie back, you’ve got a problem. Where is this? Where are these invoices? Did we get the goods in? Do we owe this money or not? And that’s critical to keep a really good eye on what’s going on. Because in that case, again, if he looked at that and done a supply, he would have seen that in the month, he had posted 30 invoices with the supplier saying just 40 invoices to you and if you’re able to quickly pick up what’s going on there.
Just ask for a statement there, you just say, Hey, give me a statement of all the outstanding invoices and you just have to do your reconciliation.
Yeah, most of them would send you in a statement each month, but you would ask for it anyway. You definitely asked for it, especially on, I suggest you look for high value or high torn items. So items that actually supply our key supplier. Or items that you’re turning a lot. So in the case of the flour as a key ingredient, he’s going through a lot of that a month and is also a big spend. So it’s hitting two things there where you want to go back and really reconciled that and see is it tying back to what the supplier says you always were.
Number four then is to, and this can take a while, but to understand your margin. What is your margin? What are you supposed to be making on these items? So in the case of the flour, in the case of the welsh factory there would have been due diligence done they might have said are we’re making a 40% gross gross profit. So I would’ve suggested when my friend went in there, he probably was putting in a 40% gross profit. That’s okay. When you get a handle on it and you feel confident that things are going okay but if you don’t have a handle on it, and you’re really not sure what your numbers was really lying at, what is the real number? Then that can lead you down a dark and dangerous path where you suddenly get caught out just like he did. So you know it’s important to try and go in there and really get a good feel for your margin. And understand what the reason margin is.
Because then it’s very clear if you do your accounts and your margin is showing 50% you immediately see if something is missing, and this happens to me all the time. All the time. You go in and you’re like I’ve made too much money here, something missing Nope, no question, no questions, something’s wrong. And want you do then is you make a provision, and I call this the provision for incompetency, so you make a provision there where you think I’m incompetence, there’s a mistake there. I’m putting in an extra 10, 20, 50 grand to bring my margin back in line with what I think it should be and we find out what the error is next month so that you can be on the reporting. You get the account done. So you say, I’m just going to put it in a provision here at the moment just to get it back on that budget.
Next I look for them in the next couple of weeks. So that’s a good tip there. Keep it. If you don’t understand this, don’t report it. That’s always my number one tip. If you don’t understand what’s going on, whatever you do, do not report it or otherwise you’re going to get yourself into trouble.
So the fifth one is cycling accounts. So what cycling accounts are is where you go in and you pick particular high value, usually high value items or high tore items and you just count those items. They, it’s like a mini stock take. And I know in another podcast we’ve got to go through stock takes and why their so important and how to get the most out of them. But in this case we’re just talking about a cycle account.
So a cycle account you do a mini stock take, so you would look on the system, you would see how many items you have of a particular high value product. You would go out then and see how many is actually in the stores. Just count those items. Then you go back and look at your, the posted invoices you received in, so invoices you posted, which shows how many you’ve bought recently, and then also your sales order. So many of these have you shipped recently and then you would just do a quick reconciliation on that versus what’s actually on your shelves in reality. And that can be very good for picking up where things are going wrong.
So maybe someone’s taken something from stores and forgot to bill it. Maybe some of what we’ve bought in some stuff on, it hasn’t been receipted in. Maybe someone’s sort of stuff as has been misappropriated or taken when they shouldn’t have been taken or maybe some stuff has gone obsolete. So you go out there and you count these items and you say, well actually five of these are no longer usable or they’re no longer… We can’t really actually sell them, or damaged even and we have to actually write them off. So cycle accounts can be very good for that. Probably doesn’t work for the example of the flour because he was going through so much flour every week. But it’s something that you can use in a lot of high value businesses, really to keep a track on your high value items. So there my five tips for really keeping an eye on your stock and keeping, making sure that you mitigate any errors and mistakes.
Accountancy Gold’s Garet, accountancy gold. I can see, especially what I like there is if you don’t understand it, don’t record it. That’s if you could, that sounds like a golden rule there. If you stick to that then you’ll understand everything in the business. So great upset. Actually I don’t want to say that I’m surprised I’m saying this was pretty interesting when you get into the detail of it and you hear about actually what the troubles that can be caused by not taking new simple steps and that’s pretty good stuff, Garet, appreciate that. So we have this along with these five tips along with dozens of others. I think we’re up to about 50 or more other tips in our book that Garret and I are writing. You can get a copy book.www.procurementexpress.com. There’s a free chapter on negotiation. Easy win for any business is to help your staff to do a little bit negotiation training. Maybe just read that chapter. It’ll save you thousands of euros or dollars or whatever you’re spending. And until that, we’ll see you next week.
All right, folks, there you have it. That wraps up our conversation with James Kennedy and Garret Carragher. They shared a ton of valuable insights and advice today on how detailed accounting practices can safeguard the goods you keep in stock. We also shared some tools and resources which will all be linked up in the show notes. Don’t forget to click on one of those links to get a free chapter from the book Profit Leaks by James Kennedy and Garret Carragher. I hope you enjoyed our conversation. Please consider subscribing, sharing with a friend or leaving us a review in your favorite podcast directory. Until next time. Best of luck in all that you do and we’ll look forward to seeing you on the next episode of The Gross Profit Podcast.