Accounting for Growth

A wholesaler or distributor can have annual revenues of $10 million or more without having sound scalable accounting policies and practices. However, such companies are more prone to significant enterprise risks. 

Lack of timely, accurate financial statements hinders management’s ability to make good financial decisions. Errors or incidents of fraud can go undetected, tax overpayments can occur and high inventory carrying costs may not be evaluated. Amid due diligence, the lack of sound accounting practices may also cause potential investors or acquirers to move to the next opportunity. 

Sound, scalable accounting policies and practices provide a foundation that sustains growth and supports a wholesaler or distributor’s operational strengths. Establishing sound, scalable accounting policies and practices requires:

    Identifying practice areas and tasks that require attention;
    Assigning  responsibility  for performing and reviewing various accounting tasks; and
    Regarding  accounting  function  costs as an investment. 
Identifying Practice Areas 

A wholesaler or distributor first needs to identify all the accounting practice areas, such as cost management and budgeting, external reporting, pricing, discount and product decisions, tax management and internal control.

Preparing a flow chart that lists steps in monthly, quarterly or annual accounting cycles further helps managers visualize the various steps in the process and whether potential gaps exists that expose the organization to risk. The first step in such a flow chart is recording an activity, such as a sale, which is posted to the general ledger. Closing entries complete the cycle for a reporting period. The initial step for the next reporting cycle may be reversing entries, in which adjustments are made for accruals or prepayments entered during the preceding reporting period.

By identifying accounting practice areas that need to be addressed and steps involved in the accounting cycle, the company has direction for assigning responsibility to individuals for recording and reviewing various activities.

Assigning Responsibility 

All entries need to be made in a timely manner for cash, accounts payable, accounts receivable, depreciation, fixed assets and other items of concern. Responsibility for making such entries needs to be assigned to specific individuals.

Responsibility also needs to be assigned for reconciling and reviewing the entries, associated accounts and sub-ledgers. Reconciliations and reviews should be performed on a timely basis, which the frequency is determined based on the account, volume of transactions, etc. These activities identify entry errors as well as potential instances of fraud. 

For tax reporting purposes, some items purchased may be immediately expensed, while costs for other items need to be capitalized and depreciated based on their time period. 

Inventory is a crucial concern for wholesalers and distributors, too. Inventories need to be conducted regularly to identify any discrepancies and items that may be damaged, obsolete or spoiled.

Segregation of duties – segregating tasks that present inherent conflicts of interest – needs to be incorporated for all accounting functions. That means the person responsible for making initial financial entries should not also be performing reconciliations or reviews for those entries. Such segregation of duties needs to extend to inventory as well. The individual who orders shipments should not be the same person recording inventory in the general ledger. 

If total segregation of duties cannot be implemented due to the number of staff, then alternatives should be considered, such as independent approval, review, checking or recalculation.  

Devising regular schedules and processes for tasks such as account entries, reconciliations and inventory counts enables such functions to become imbedded practices that can be expanded as the company grows.

Making an Investment

How quickly can a wholesaler or distributor detect shifts in general economic conditions or in buying preferences among customers? Maintaining timely, accurate financial information gives managers the information they need to make better decisions.

How much money may be lost to incorrect tax payments, unreliable inventory practices or ongoing theft? Sound accounting practices provide essential internal control for financial and inventory concerns.

When investors, merger candidates or acquisition targets approach the company, will they trust the financial information? That depends upon the company’s accounting policies and practices and the adequacy of their financial systems and personnel.

Whatever a wholesaler or distributor’s strategy and long-term plans might be, incorporating sound, scalable accounting policies and practices into your organization provides a foundation for pursuing such goals and preventing problems as well as improving the information used for making decisions.

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