Do you spend late nights and weekends struggling to keep up with your company’s accounting records? Or worse, does this time intervene with the time spent running the operations of your business?
Are you unable to assess the profitability of your business or perhaps have difficulty understanding the cash requirements for the next 60, 90, or 365 days?
Do you feel your margins could be improved but aren’t sure how to evaluate them when looking at your financial statements?
Would some assistance in projecting your business operations over the next few years help you establish priorities with your employees?
If you answered yes to any of these questions, then you are in good company. Many business owners and executives feel the same way and there are ways you can get the support you need to move your business ahead.
The first step is acknowledging that, although operations are the most key aspect of any business, accurate financial information is vital to making important business decisions. Having visibility into cash flow and knowing where your margins can be improved will enable you to take your company to the next level.
Now the next step is determining if hiring a full-time accounting resource to get your company’s financials in order makes sense from a cost and expertise standpoint.
Is there enough work for a full-time accountant?For many companies, a 40-hour a week accountant would be in excess of the time required to perform the basic accounting functions they may need, e.g., monthly close process, issuing invoices, entering and paying bills, performing payroll, etc.
Is there too much work for your current full-time resource? And are you asking them to do things beyond or below their skill set? This is a very common occurrence with any role in a growing business. This is a lose-lose situation for everyone involved and can lead to internal turnover.
What level of experience will they need to have – CFO, controller, staff accountant? If you are not in a position to support the costs of more than one accounting resource, will you hire a CFO and then over-pay them to do basic staff-level accounting? Alternatively, you could hire a staff accountant and task them with CFO responsibilities; however, both of these options can cost your company significantly and lead to ineffective decision-making.
If your company needs the resources of a complete accounting team but is not in a position to support the costs and management time of that entire, full-time team, then outsourcing your accounting functions is a very viable, flexible, and turn-key option for your business.
Outsourced accounting companies such as Signature Analytics provide you with flexibility in terms of the number of hours of service to receive, provide a higher level of experience through oversight by more senior-level individuals, and ensure efficient service by experienced accountants (staff accountants through CFO level expertise). The accounting teams at outsourced accounting companies work with multiple clients so they have identified time-saving methods that allow them to complete challenging tasks in significantly less time than a typical bookkeeper.
In addition to acting as the financial arm of your business by providing the resources of a highly experienced accounting department on an outsourced basis, there are a number of other situations in which hiring an outsourced accounting company to handle your financial information might make sense for your business:
Preparing for a financial statement audit or review
Many business owners believe that a financial statement audit is a healthy process for their business and provides confidence to their investors in the financial information; however, most do not realize the resource drain that an audit can have on their business due to the significant number of requests for supporting information and the technical accounting expertise which must be applied to the financial statements. Due to independence restrictions, audit firms cannot assist in performing the accounting functions at the companies they audit and therefore must rely on management to determine proper accounting rules. These issues tend to cause significant overrun bills from the audit firm due to the inefficiencies experienced and can be extremely costly for a business. Engaging an outsourced accounting company can provide management with the peace of mind that they have a team of accounting experts – most of which have previous experience performing audits – that understand what audit firms are asking for and know how to produce that information in a timely manner.
Investors requesting financial projections
Investors love to see what the future of their capital will produce so that they can assist in both financial and operational decisions; however, many business owners do not have the expertise to prepare financial projections and therefore may provide information at a level not detailed enough for the purpose or may be missing significant costs which need to be considered. Outsourced accounting firms that provide support with cash flow management and projections have CFO-level experts who are experienced in understanding a business operation in a very timely fashion and can translate such information into the future potential results of the organization.[gap height=”10″]
Missing out on potential tax savings
When a tax provider receives your financial information they may not search into all of the accounts to find tax deductions. If transactions have been classified to incorrect accounts, tax preparers may not be aware of their existence and therefore not consider simple deductions. A simple example would be meals & entertainment expenses, often a deductible expense, in which some transactions may end up recorded in office expense categories or supplies or miscellaneous. Unless the tax preparer knows that such expenses may be improperly classified, the deduction will go unreported resulting in higher income tax. An outsourced accounting company can organize accounting information and work directly with tax professionals to help identify as many tax savings as possible.
Looking for capital investment from financial institutions
Perhaps you have a capital requirement in the near future and plan to approach different financial institutions. Providing financial information with obvious errors, inconsistencies, or lack of organization could severely impact your ability to raise capital as it may be challenging for the lenders to truly understand the results of the business without transparent financial information. When hiring an outsourced accounting company, you can be confident that the financial statements are timely and accurate. Furthermore, they will provide you with a high-level financial resource that can assist in preparing analyses of the financial information in a professional manner making the lender proposal process less arduous. These statements may be used as a resource to assist in conversations with those providing capital assistance to ensure a complete understanding of the business’s results of operations.
“Cash is King.” We hear this phrase time and time again, but why is it so important for small and mid-size businesses? The short answer – if you run out of cash, your business fails. Seems obvious, right? However, what may not be as obvious is that being profitable is not the same thing as being cash flow positive. In fact, many businesses that show profitability within their financial statements have ended up in bankruptcy because the amount of cash coming in does not exceed the amount of cash going out.
As an example, consider a service company that just started with a new customer. In January, the company provides the service and invoices the customer on January 31st. The company recognizes the revenue from that customer in January, but probably does not collect the cash until February or March. Meanwhile the company had to pay its’ employees on January 15th and the 31st. Thus cash outflow exceeded cash inflow in January. When you multiply this scenario by hundreds of customers, or consider a month with significant customer growth, you can see how the company could run into cash flow issues.
If a company cannot balance the cash inflows with the proper cash outflows then their profits on paper or supposed net-income are meaningless. Firms must exercise good cash management otherwise they may not be able to make the investments needed to compete, or might have to pay more to borrow the money they need to function.
What the Experts Say About Cash Management
Several industry leaders and associations have all found that cash flow problems can be one of the leading causes of failure for businesses…
82% of businesses fail due to poor cash flow management / poor understanding of cash flow.
— Jessie Hagen of US Bank
Despite the fact that cash is the lifeblood of a business — the fuel that keeps the engine running — most business owners don’t truly have a handle on their cash flow. Poor cash flow management is causing more business failures today than ever before.
— Philip Campbell, author of Never Run Out of Cash (Grow & Succeed Publishing 2004)
Insufficient capital is one of the main reasons for small business failure, coupled with lack of experience, poor location, poor inventory management and over-investment in fixed assets.
— U.S. Small Business Association (SBA)
A Case Study: Importance of Monitoring & Analyzing Cash Flow
One of our clients, a media company, believed they needed a significant capital infusion to support their growth plans, but were uncertain when and how much capital would be required. So we generated a detailed five year cash flow projection to forecast and identify all the time periods in which the company’s cash balance would become negative.
Analyzing the company’s cash flow projections revealed that they would require additional capital even after reaching profitability which is actually typical for early-stage companies, or companies in a high-growth mode. The projections also revealed that the amount of capital required to remain cash flow positive was 50 percent higher than they had initially anticipated.
Knowing their true capital needs allowed the company to raise the appropriate amount of capital required to support their growth plans and, more importantly, ensured they would not run out of cash.
Achieving a positive cash flow does not come by chance. You have to work at it. Companies need to analyze and manage their cash flow to more effectively control the inflow and outflow of cash. The Small Business Association recommends monitoring cash flow on a monthly basis to make sure you have enough cash to cover your obligations in the coming month.
By proactively getting in front of your future cash needs, you can make the right business decisions to solidify your cash position, and establish a foundation for growth.
The process of creating and managing to an operating cash flow budget is not intuitive or easy for most small and mid-size business owners. If you need assistance managing your company’s cash flows, developing detailed financial projections, or identifying capital requirements, contact Signature Analytics today for a free consultation.
The CFO’s role within an organization depends on several factors. These components may include the expectations coming from the CEO and board of directors, and may also vary depending on the industry, corporate strategy, and the goals of the business. A company’s size can also have a significant influence on the CFO’s role.
Below, the Signature Analytics team has outlined some general responsibilities that every business should expect from their CFO.
The Importance of Forward-Looking Financial Analysis
The foundation of any company’s accounting and finance function is to produce timely and accurate financial information for the business. The CFO oversees these accounting and finance functions, but their true value comes from the ability to provide forward-looking financial analysis. This analysis should be focused on driving additional profitability and value to the company.
Whether you have a full-time, part-time, or outsourced CFO, below are some examples of the forward-looking financial analysis you should expect from the CFO role:
1. Cash Management & Forecasting
Can you predict when your business will have a surplus of cash that needs to be managed or when you will have a shortage of money that requires financing?
Cash flow problems can kill businesses that might otherwise survive. Your CFO should be monitoring cash flow and analyzing cash flow projections regularly to ensure your business does not run out of cash.
2. Budgeting & Expense Control
Does your business have a budget? Do you receive an analysis comparing prior year actual, current year actual, and current-year forecast on a regular basis?
Your CFO should own the budgeting process by incorporating input from each department for the most accurate and complete projections. They should also be monitoring budgeted versus actual results on a quarterly or monthly basis and reforecasting accordingly.
Is the compensation of your employees aligned with the goals of the company?
The CFO of a company should help to structure employee compensation plans that incentivize efficiency and align with the financial goals of the company.
4. KPI Development & Analysis
Are you maximizing margins? Are profits analyzed by revenue stream? Are employees being utilized appropriately to maximize profitability?
KPIs (Key Performance Indicators) are different for every business. They should act as the company’s compass, and the CFO serves as the navigator.
It is the responsibility of the CFO to work with those in operations to help develop KPIs applicable to the company and support the analysis of those KPIs regularly. The CFO should be using the data from the KPIs to assess business performance in real-time. Making changes that directly improve KPIs can help build the future value of the company.
Are you providing valuable financial information to your Board of Directors so they can review the trends of the company’s operations and assist in making appropriate decisions? Is the information presented professionally?
Your CFO should be preparing presentations for your board members that effectively communicate the company’s financial information in an organized manner. The information should illustrate trends to visualize projections so the data can help drive business decisions.
6. Securing Financing & Raising Capital
Do you review your banking relationships regularly? Are you confident you have access to financing on the best possible terms for your business? What are the capital needs of the company now and in the future? What is the best way to meet those needs?
Your CFO should play a key role in identifying and securing investment and financing. They should identify capital requirements before approaching financial institutions and investors to ensure you raise the appropriate amount of capital required to support your growth plans.
A successful CFO should also prepare presentations of the company’s financial information, allowing potential investors or lenders to understand the data and the companies performance.
7. Tax Planning
How often are communications occurring with the company’s tax advisor to maximize all tax-related strategies?
Your CFO should maintain consistent communication with tax preparers to minimize your company’s potential tax liability.
8. Ongoing Analysis & Review
All of these responsibilities should be considered ongoing processes that are revisited on a regular pre-determined schedule and modified based on the most recent financial information available.
Furthermore, all of the results should be measurable to track the success of the performed analysis.
A Solution That’s Right For You
If your CFO is providing forward-thinking analysis, they are providing infinite value to your company.
Each of the outlined goals above can help maximize profitability and value for the business, and, if managed appropriately and adequately, companies with the correct financial infrastructure can witness significant operational improvements and growth. Having this kind of efficiency will allow you to think about your business in new ways and likely uncover new possibilities for what’s next.
If your business requires any (or all) of the forward-looking financial analysis mentioned above, but you’re not in a position to hire a full-time CFO or may have a team that just needs additional support, the team of experts at Signature Analytics can help.
Our highly experienced accountants can act as your entire accounting department (CFO to staff accountant). If that solution isn’t the right fit, our team can complement your internal accounting staff, to provide the ongoing accounting support, training, and forward-looking financial analysis necessary to effectively run your company, analyze operations, and guide business decisions.
Whether you own a small company or a large corporation it is important to maximize the value of your accounting records so you can make the most informed and appropriate decisions for your business. The accounting method your company uses can have an impact on your ability to make these financial decisions, so it is important to choose the best method for your business.
There are two primary accounting methods that companies use to track their income and expenses – cash basis or accrual basis accounting methods. Below we will review the advantages and disadvantages of each accounting method, discuss the impact they could have on your company, and assist you in evaluating which method is the most appropriate for your business.
Here are some important criteria to consider when performing this evaluation:
Who are the users of the financial statements and information (management, investors, bank, tax advisors, etc.) and how will they use this financial information?
What method of accounting is the company using for tax purposes?
What is the vision of the company in the next 5 years?
Cash Basis Method of Accounting
With the cash basis method of accounting, transactions are accounted for based on the company’s cash inflows and outflows. For example, revenue is recorded by the company when the cash is received from customers and expenses are recorded when payments are made to vendors. Because all transactions are recorded based on the cash inflows and outflows, the company’s balance sheet will not include, or track, the accounts receivable or accounts payable. With this method, accounts receivable and accounts payable are usually tracked separately within the company’s accounting system or on the side.
Many small and start-up companies will use the cash basis accounting method because it is typically the simpler of the two methods from an accounting standpoint. At this point in a business, companies also tend to place a lower level of importance on the financial information of the company, so the cash method is sufficient for their purposes.
Accrual Basis Method of Accounting
Under the accrual basis method of accounting, transactions are accounted for when the transaction occurs or is earned, regardless of when the cash is paid or received. Income is recorded when the sale occurs and expenses are recorded when the goods or services are received.
Although it is slightly more complicated from an accounting and tax preparation standpoint, there are significant advantages for companies using the accrual accounting method. These advantages include:
The ability to “match” revenues and related expenses within the applicable periods so companies can appropriately analyze profitability margins.
Creating consistency as to when the revenues and the expenses of the company are recorded allowing for increased ease of budgeting and forecasting.
If the company is looking for additional financing opportunities, banks and other investors usually ask for the financial information in the accrual basis method of accounting.
In general, the accrual method of accounting provides a better picture into the financial results of the company. This allows users of the financial information to make more informed decisions, ultimately providing additional value to the company.
Which Accounting Method is Best for Your Business?
Based on the information above, let’s revisit our consideration questions to help you evaluate which method is best for your business.
1. Who are the users of the financial statements and information (management, investors, banks, tax advisors, etc.) and how will they use this financial information?
If the users of the financial information are strictly internal management and there are a limited number of transactions, the cash method may be appropriate; however, management will be limited to the financial information available when making decisions.
If the company has outside investors, bankers, or other advisors, it is highly recommended to utilize the accrual method. Not only will it provide substantially more insight and value to those users, it will also show that the company is sophisticated enough to take the next step as a company.
2. What method of accounting is the company using for tax purposes?
From a tax perspective, the accrual method MUST be used for the following companies:
Your company is a C corporation.
Your company has inventory.
Your gross sales revenue is greater than $5 million (there are some exceptions to this rule that you should discuss with your tax accountant).
If your company is required to report taxes on an accrual basis for any of the reasons above, then you should always account for your internal records on an accrual basis as well.
If your company does not meet the above criteria, then you have the option to report taxes on a cash or an accrual basis. Many times it is more advantageous to report taxes on a cash basis and these options should be discussed with your tax accountant. However, even if the cash method is the best option from a tax perspective, it may still be beneficial from a management perspective to use the accrual method for internal reporting purposes.
3. What is the vision of the company in the next 5 years?
If your company is small, has limited transactions, and there are no plans for growth in the future, then the cash basis method of accounting would likely be the preferred and most reasonable option.
However, if your company forecasts growth in the future, especially if you plan to have revenues in excess of $5 million, it is important to begin accounting for the company’s transactions on an accrual basis as soon as possible. This transition is essential as you prepare your company to enter into discussions with other advisors and begin seeking out potential financing opportunities. It will give your company and management credibility and allow you to make the most appropriate and informed financial decisions for your business.
Making the Transition
If your company is currently using the cash basis method of accounting and feel it may be time to transition to an accrual method, we can help. Our experienced accounting team has assisted several companies with this change – some to facilitate the growth of their business and others to provide better insight into the financial health of their company. Contact us for more information or to receive a free consultation.
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ABC’s Shark Tank has quickly become one of the most popular shows on television with over 7 million viewers on a weekly basis. The premise of the show is quite simple, entrepreneurs present their business idea to a panel of five well-known millionaire investors, including Mark Cuban (Dallas Mavericks), Daymond John (FUBU), Kevin O’Leary (SoftKey Software Products), Robert Herjavec (BRAK Systems), Barbara Corcoran (real estate), or Lori Greiner (prolific inventor), known as the sharks, in hopes of raising equity financing. The sharks pick apart the ideas, presentation style, valuations, and anything else the entrepreneur offers to better understand whether it represents a viable business worth investing in. A few lucky entrepreneurs will be presented with finance offerings from one or more of the sharks along with a relationship with a proven successful business partner.
The popularity of the show has raised a number of questions as to whether it truly is beneficial to apply for the show and there are some key concepts to consider for the general public understanding of raising capital for their businesses.
The ability to be featured on the show, regardless as to whether a shark offers investment, has shown an increase in sales up to 700% for these businesses. One company, BuggyBeds, went from being in 60 stores to being in 600 stores with sales going from $150,000 to over $1.2 million in the two months following their appearance on the show. Another company, Scottevest, walked away from a combined $1 million in offers from the sharks and after the episode aired generated so much traffic to their website that it crashed that night. This has been known as the “Shark Tank Effect”. It can take a business operating out of a garage selling a few units a month with its biggest concern being how to get the next sale, to a large company concerned about how to fulfill the rapid incoming orders. An entrepreneur who is informed that their presentation will air on national television needs to prepare the business to ensure that it doesn’t fail due to increased sales — certainly a great problem to have.
The producer of the show, Finnmax LLC, does not make applying for the show as simple as filling out a form and submitting a video like so many other reality shows. In reading the 19 page initial form and agreement, the entrepreneur is warned that they will be required to enter into additional agreements with Finnmax relating to the business presented which some have noted include giving up property rights but no clear understanding of what those additional terms would include. Additionally, the producer or their designee (collectively the “Shark Tank Entities”) will receive an irrevocable option to either (1) receive a 2% royalty of the operating profits of the business, or (2) receive warrants that give the Shark Tank Entities a 5% equity interest in the business. This option vests if the business enters into an agreement with one of the sharks within two years of the date of the presentation or if the entrepreneur’s presentation is included in an aired episode of the show. This could certainly be a steep price to pay for a start-up business whose ability to raise capital may be solely based on the available equity to provide to investors and whose minimal profits are valuable to the company in order to expand and grow.
An entrepreneur certainly must weigh the risks and rewards of applying for the Shark Tank. With only about 4-5 presentations per episode and undoubtedly thousands of applications, the chances of airing on national television to obtain the attention of over 7 million viewers can be very slim and the company may still be required to give up equity for no capital or a perpetual royalty.
San Diego is certainly full of very talented entrepreneurs with novel business ideas. The Shark Tank has already aired San Diego based companies, Tower Paddle Boards and GobieH2O, which both have experienced great success. Much can be learned from their presentations along with the other entrepreneurs on the show. Some key ideas that even the occasional viewer will pick up on are the following:
Know the valuation of the company, how much to ask for, and what it will be used for – Every segment on Shark Tank starts with the entrepreneur expressing how much they are looking to raise and what percentage of equity they are willing to part with. Each investor quickly jots down the numbers to essentially calculate the total valuation of the company. The entrepreneur must have a good understanding of how they determined the valuation and should be sure to balance between what the company could be worth to what a dream valuation would be. Over valuing your company could negatively impact investors’ view of you as a business person.
Understand the key terms and your numbers. Each of the sharks dive into the business model and always seem to ask the same questions about sales, margins, patents, and distribution or retail partners. Stumbling with these basic concepts could cause investor concern about your ability to run the business. Furthermore, understanding your competition and the size of the market can impact the valuation of the company and how successful it can become.
Tell a clear and concise story. Time and time again, entrepreneurs spend 5-10 minutes explaining their idea and expressing how much passion they have to make it successful, but leave the investor confused about the product or service and unable to see the value from a consumer level. The story must include all the facts that an investor would be interested in. And while a willingness to work around the clock to become successful is important, it doesn’t necessarily mean you have a viable business worth investing in.
Remember that Shark Tank is for television entertainment purposes. Watching an episode of Shark Tank can sometimes give the impression that capital raising is as simple as presenting your product before investors start throwing offers at you. Certainly the real world is quite different and the due diligence process for investors can be quite intense and time-consuming for the entrepreneur. Furthermore, entrepreneurs should truly understand the investor partnership they would be getting involved in to ensure that it is an appropriate fit for the business and the personalities of ownership. Finally, it is important to clearly understand all the terms of the offer agreements before signing to avoid future disagreements with investors, even minority investors, which can result in significant legal fees.
Hopefully we’ll continue to see other San Diego based companies take the dip into the Shark Tank in the future and come out without any bite marks.
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