The company was a very long way behind with its bank reconciliations and was fast approaching year end and an external audit.
The company had been acquired by a listed US Corporation on the back of limited due diligence and subsequent to the takeover, the new owners discovered that the banks had not been properly reconciled for circa two years. A small project team was employed to try and get the reconciliations up-to-date but after several months was still not close to resolving the situation.
The company was using an ERP system that had been set up to post individual cash receipts or payments as multiple items, with one entry for each invoice being settled. This meant that in the case of a daily cheques received, of which there were many, one amount on the bank paying-in-slip and therefore bank statement might have to be matched to multiple, sometimes hundreds, of items in the general ledger bank account; a situation that was exacerbated when receipts were in a foreign currency and adjustments for exchange rate variations also had to be accounted for.
The company needed to get through an impending audit without having its accounts qualified and find a way to reconcile its bank accounts promptly, in-line with a short monthly closing cycle.
The company’s Finance Director turned to Mark to see if he could provide a solution.
Mark quickly assessed that the manual exercise to try and get the reconciliations for prior months finished could not be completed on time for year-end, even with a huge increase in the number of people working on the exercise. Therefore, he proposed the creation of a year-end bank reconciliation based on activity around the year-end in both the general ledger and bank; essentially retrofitting the bank reconciliation and working out what the closing ledger balances should be. The difference this produced would be written-off. After some negotiation, Mark demonstrated to all concerned that this approach had produced a satisfactory result and the auditors accepted it for audit purposes.
Mark also developed a new streamlined approach to cash accounting for the business, which involved winding down and closing some existing accounts and setting up new ones so that, for example, all purchase ledger payments went through one bank account and had a matching general ledger account. The process also involved using Excel cash books, created by Mark, as a tool for matching transactions and producing reconciliations: for technical reasons, the ERP system could not be used to do that.
The time taken and resource required to reconcile the bank accounts was massively reduced and all accounts were regularly reconciled within two working days of month-end. The company knew with confidence what its daily cash position was.
Case Study: Mark Linas (Click here to see his profile)