Financial department personnel developed the changes at AMAX as part of the recurring cost containment projects which have become a familiar part of the business landscape. Most changes looked simple individually but required a willingness to adopt new routines--both inside and outside the headquarters financial departments--necessitated improved employee skills--especially related to personal computers--and depended upon management support.

It became clear late in the process that several basic concepts had been applied to our reviews of procedures. These approaches are not original and have been widely discussed in the business press:

* Eliminate unnecessary tasks;

* Do it right the first time;

* Collect only information you have a reasonable expectation of using;

* Simplify procedures for low-risk transactions;

* Use the smallest computer that will do the job;

* Automate tasks whenever it is cost effective;

* Use off-the-shelf software when possible. It's cheaper, faster to install, and easier to modify than custom-written programs.

Eliminate Unnecessary Tasks

Changes in the environment may permit eliminating financial department tasks without causing additional expense elsewhere. We stopped cashing personal checks as automated teller machines became widely available, offering a convenient way for employees to obtain cash. Acceptance of credit cards at nearly all hotels and restaurants permitted employees to charge travel and entertainment expenses, so we could stop issuing traveler's checks. We found automobile rental charges were generally modest. We therefore ask travelling employees to charge their costs on their credit cards rather than using the company rental car charge card. This eliminated the need to compare car rental costs from bills to expense accounts. (Automobile rental discounts remained the same after this change.) To reduce the volume of cash disbursements, executives were asked to pay smaller bills, generally under $300, directly and to include them on their expense accounts. We also stopped intercompany transactions of less than $1,000. This reduced the volume by 20% and simplified intercompany account reconciliations.

Payroll procedures provide another example. AMAX formerly drew advance payroll checks for employees who expected to be away on the normal pay day. With direct deposit of payroll checks, now a reliable and inexpensive alternative offered to all employees, we stopped providing advance payroll checks. Despite some initial skepticism, employees are now very satisfied with direct deposit. Nearly our entire payroll is handled this way.

Do It Right The First Time

Providing the tools and training so tasks can initially be performed correctly avoids the time, effort, and expense of making corrections. A knowledgeable and well-trained staff can help you avoid the familiar nightmare of accounting records containing a jumble of incorrect entries.

Here are two specific examples of the benefits of doing it right the first time:

* On-line data entry was substituted for batch processing. Therefore, accounting department personnel get immediate feedback if debits and credits are not equal, nonexistent codes are used, or essential elements omitted. Entries are adjusted immediately while all the papers are still readily available. This avoids the time-consuming task of correcting improper entries with journal entries which, of course, are sometimes themselves entered incorrectly.

* Rewriting material submitted to financial planning by business units. Each year the financial department prepares a plan which includes an executive summary and a discussion of each major business unit. In the past, each business unit prepared a draft version of its section which was rewritten at corporate headquarters. This led to controversy about the appropriateness of changes and discouraged the business units from sending a top quality document. They expected it to be rewritten. Last year we included each business unit's plans as written after providing comments on their preliminary drafts. The resulting plan book was not quite as slick as in prior years. There were some inconsistencies in wording, captions, and graphics. But headquarters rewriting was eliminated, and discussions of the content were greatly reduced. In addition, the business units were able to present their views to senior management and the board without a headquarters filter.

Control Information Proliferation

Collecting seldom-used information carries a high price even with the automated data processing systems available today. At AMAX we once obtained financial statements for each corporate entity and consolidated the information from over 200 companies at headquarters. Information about individual corporations was seldom used. When an acquisition doubled the number of AMAX's corporations, we asked each of our business units to submit combined statements for its group, a task each was separately performing to manage its operations. This change reduced the number of consolidated entities to 18 and permitted moving the data- processing task to an inexpensive personal computer. In addition, data exchange (and the possibility of error) was greatly reduced, as were intercompany eliminations. Financial statements of individual corporations remain available at the business-unit level for the rare occasions when they are needed.

Make Sure Controls Are Cost Effective

Elaborate controls for low-risk transactions are not cost effective. Inexpensive personal computer software can write checks and prepare a well-organized summary of disbursements. We have provided two departments with imprest bank accounts on which they are authorized to draw smaller checks. Drawing checks is no more trouble for them than preparing check requests and a convenience if the check is to accompany documents or is needed quickly. Our accounting department records only one transaction a month instead of each check, which has reduced its total records volume more than 10%. Simplified reviews before the reimbursement checks are issued are all that are considered necessary because of the limited exposure to loss and the cost savings derived.

In many companies, expense accounts are poorly prepared, and monitoring is a significant accounting department chore. We are fortunate that expense accounts seldom contain errors, possibly because they are checked by conscientious and well trained secretaries. Since few errors are found, we switched from a detailed accounting review of expense accounts to spot checks supplemented by more extensive periodic internal-audit testing.

Use Small Computers When Appropriate

Economies of scale have been a major factor in making data processing decisions in past years. When computers first became popular, large machines were cheaper per unit of capability than smaller ones. Now, however, the cost of computing power declines as machines get smaller. Not surprisingly, smaller machines are less expensive to install and maintain than larger computers. In addition to lower hardware costs, a vast array of inexpensive, but very sophisticated, software exists for smaller computers which can perform nearly every conceivable office function. Substantial savings can be achieved by using smaller computers if they can do the job.

The key management issue in selecting equipment is defining the job to be performed. For example, should a remote location be set up with a stand-alone computer system to handle its own processing needs or should it be part of a centralized system? There is no universal answer to defining the job, but management style and economics may point strongly to a direction. A centralized organization will generally prefer the control provided by a centralized computer system, while a decentralized organization will be attracted by the flexibility and autonomy provided by a decentralized computer system.

Equipment Costs Less Than People

The prices of smaller computers and related equipment have dropped to the point that it is economical to provide all employees with the equipment they need at their desks to perform their jobs. Just as we put a telephone at each desk, even for employees who make few calls, we also put a computer at the desk of each employee. It is not economical for regular-user employees to share computers. We have also found it is cost-effective to give employees full sets of peripherals like printers even if their volumes are relatively low. Linking equipment together in networks is an excellent way for employees to share data but careful consideration should be given to the installation and maintenance costs before using networks to reduce the use of inexpensive hardware.

Use Off-the-Shelf Software When Possible

Not many years ago businesses relied primarily on software written for their own specific needs. Development of new programs frequently required several years to define inputs and outputs, prepare flow charts and detail coding, and finally test and debug the resulting products. Programs were frequently out of date when implemented, expensive to modify, and very costly. Today a variety of packaged software is available at prices comparable to a short business trip, in some cases less than a taxi ride from the airport. These programs seldom do exactly what employees would ideally like or are now accustomed to. The economics, however, so strongly favor off-the-shelf software that very careful consideration is appropriate before going to custom written programs for general business operations.

Computer software is somewhat like the automobile. There are a variety of models available, and most users can satisfy their needs at a reasonable cost with delivery of a stock car in a short time period. If a user wishes to meet the ideal configuration for his or her particular needs by combining the trunk from one car with the engine from a second and an interior from a third, the resulting automobile would be many times more expensive and require months or years to custom manufacture.

Sources of New Procedures

The new AMAX procedures were developed internally by employees. The ideas were generated mainly in discussions about the tasks to be accomplished and what could be done to simplify the job. Two accounting tools helped in reviewing procedures. The first is cost accounting. After calculating the cost of preparing checks, we could focus both on steps which would reduce the cost and seek ways to eliminate writing checks for small amounts. Allocating data-processing costs helped users evaluate alternate systems and increased the willingness to consider different input routines and system outputs.

A second accounting tool was to sort transactions by size. We recalled the 80/20 concept of inventory management which says that 80% of the sales value of inventory is typically derived from 20% of the items. When we listed the transactions for a period in order of magnitude, we quickly noted that a large volume of checks and intercompany transactions involved very little money. Reducing the number of transactions per se was not the complete answer. We also had to change the effort involved in doing the processing of the transactions, otherwise all we would have done is increased the cost per transaction. We used the information to focus the search for ways to reduce these costs.

In retrospect, the financial department achieved significant cost reductions by applying the analytical and cost accounting procedures which are common in operations.

Charles Todor, CPA, Controller, AMAX, Inc.