Quarter four is the time for annual planning and budget development (if not before). It’s also the time of year when some CEOs realize that their budget last year might not have been entirely based in reality. If you have looked at your budget vs reality and realized that the two are only distantly related, the first step to take is to gather the troops and do a strategic budgeting exercise.
Unlike in the BCE years (Before COVID Era), 2023 budgets can’t be a roll-over exercise. With rising inflation, interest rates, and costs, as well as the threat of a potential recession, your 2023 budget will need to be well-thought-out and, as the title of this article suggests, strategic.
“A business needs to have both a strategic plan and a budget.”
What is a Strategic Budget?
A strategic budget provides the tools to set up a dynamic financial model and lay out clear goals for future success. A strategic budget is made up of two elements: A strategic plan and a budget.
A strategic plan lays out the future direction and goals for your business’s overall vision while outlining clear actions to achieve them.
A budget is used to identify financial and key performance indicators to ensure your business is meeting its goals.
When the strategic plan works hand in hand with your annual budget, the combination ensures that your company’s vision is clear and on track throughout the year.
Your strategic budget starts with a plan. You need to lay out your business goals and what must be done to achieve them. It’s important to take your time on this step, as it’s the foundation for the whole process and will set the tone for your financial year.
Assemble your leadership team, review goals per department, examine the budget from the previous year and discuss discrepancies between reality and that historical budget. This is how you’ll be able to forecast what funds will be needed to implement your plan over the next 12 months and what the expected impact of your vision will be.
As you operate your business throughout the upcoming year, the strategic budget will be your source for identifying financial and operational key performance indicators (KPIs). It will be a guide to give you a clear tool to gauge your business’s financial health as the year progresses.
Why Do You Need a Strategic Budget?
Running a business without a strategic plan and a strategic budget is inadvisable. Doing so, especially in financially volatile times, is borderline reckless. A strategic budget gives your business the financial intelligence to understand and define its needs from its wants. With those insights, decisions can be made to optimally invest available cash and have more available for future needs.
In addition to providing a framework for financial decisions throughout the year and an understanding of predicted cash flow, strategic budgets can provide stability during major events such as mergers, acquisitions, and turn-arounds.
A well-constructed strategic budget, built to support your strategic business plan, gives your business greater stability and puts your business in a position to improve margins, increase profits and make better business decisions.
Download this in-depth e-guide on strategic budgeting and set yourself up for success in the coming year.
If you need help in developing the financial insights and reporting to use in your strategic planning and budget efforts, an outsourced accounting and CFO services team can help. In addition to the free resources, you can find on our blog Signature Analytics provides premium outsourced accounting services with a proven track record of success for our clients. Need forward-facing financial expertise? See how our CFO and business advisory services provide greater visibility into your business financials.
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Business owners need both accounting and finance to effectively run a profitable company. Many companies find that they have one or the other well in hand but are missing critical parts of a complete accounting and finance department. In this article, we outline the roles and responsibilities of accounting and finance teams, why they are both essential parts of a well-run organization, and how to evaluate whether your company has all of the necessary players in place.
A brief overview of the Accounting and Finance functions:
Accounting focuses on capturing a snapshot in time of a business’s financials. An accounting team looks back at a company’s past financial transactions to keep score (think: month-end close, historically-facing data).
Finance is focused on strategic financial decisions for the future (think: forecasting, debt-structuring, financial strategies, and analysis).
To have a complete picture of your business, you want the accounting team’s historical-facing data to support the finance team’s future-facing decisions. Let’s look at the Accounting Team first:
What are the key metrics an accounting team should provide?
Inaccurate or incomplete data leads to uninformed decisions. For a business to make intelligent choices, accurate accounting metrics must be available in a timely fashion. In addition to accuracy and timeliness, that data must be understandable.
Here are some of the key metrics every accounting team should track:
Operating cash flow:
An “at-a-glance” view of cash flow in and out of the business.
Working capital:
Accessible liquid capital vs short-term debts, operating costs, or loans.
AP (Accounts Payable/AR (Accounts Receivable):
The formal way of tracking what you are owed and what you owe.
Direct Cost & Operating Margins:
The amount of profit that is made through sales after subtracting costs of production, wages, & raw materials.
Operating Income
The sum total of a company’s profit after subtracting its regular, recurring costs and expenses.
Net Profit
Operating income minus taxes and interest.
Return on Equity
Return on Equity (ROE) is the measure of a company’s annual return (net income) divided by the value of its total shareholders’ equity, expressed as a percentage.
All of these metrics are compiled monthly into what we all know as a month-end close in which the accounting team reviews, records, and reconciles all account information.
Understanding these documents helps you and your leadership team make strategic decisions for hiring, inventory management, cash flow, debt structure, future initiatives, and other critical business decisions.
As the CEO, you need experienced people onboard to handle both accounting (the day-to-day and historical-facing) and finance (the future-facing) functions. Without a strong, experienced team, you may find yourself wearing the CFO, controller and even the bookkeeper hat in addition to your role as leader of your organization.
What expertise do you need in your finance and accounting departments?
As the size and complexity of your business increases, the expertise and experience level of your finance team will need to keep pace. While your bookkeeper may have grown with the business, bringing in accounting roles and finance roles to support your staff can directly benefit your business.
As you audit your existing team, think of the following roles and how they can support accurate, timely and relevant financial data to drive your business forward:
Your accounting team should have a staff accountant, accounting manager, and controller. Note: the controller bridges the divide between accounting and finance departments, acting as a liaison between the accounting (historical-facing) and finance (future-acing) roles.
Your finance team should have a controller, possibly a finance manager who oversees AR/AP and Payroll, and a CFO or finance leader in that executive role of CFO.
When you think of the role of the CFO and the finance department, the larger the organization, the more important the strategic business advisory role of the CFO is. The CFO is responsible for financial strategy, investor relations, shareholder reports, and strategic shifts made to increase profitability. As a business owner, their insights will help guide major business decisions.
How can I tell if I have the right people on my accounting and finance teams?
If your business has grown, if you find that you are not getting the insights you need to make the right decisions at the right time, you may need a more experienced accounting and finance team.
At Signature Analytics, we begin every engagement with a 30-day assessment during which we take a deep dive into a company’s people, processes, and technology. Because we provide a flexible and scalable outsourced accounting solution, we can recommend a team that will not only provide what a business owner needs today to address issues that are pressing
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Most often, when you start a business venture, money is tight. You are usually focused on pouring your savings to get the business up and running. While you’re busy managing the day-to-day aspects of running a business, you may overlook other tasks like developing sound processes and workflows that aid in the management of the finances of your business. It happens a lot. However, once your business starts growing, the importance of having a sound accounting and financial management foundation is highlighted.
Most business owners then begin to consider better, more efficient, and accessible ways of understanding their numbers to grow their business. They start to assess the different roles that make up the accounting and finance function. They start asking questions such as; will a bookkeeper be able to take care of the financial functions of my business, how do I find a good accountant, or do I need a CFO? Below we’ll address these questions to help you better understand the financial management team you need to grow your business.
Bookkeeper vs. Strategic CFO
Depending on how big your business is and its lifecycle, there are various options for managing its financial operations. There are internal and external roles that can help with day-to-day financial processes, such as reporting and strategic advisory functions, that have to be considered when choosing a team to manage your business’s finances.
The financial management team you choose will depend on your goals, resources, and the expertise of the people you already have on your staff. Below, we will further explain who strategic CFOs and bookkeepers are to help you determine which of your organization’s needs.
While we understand that these are two VERY different roles within the accounting and finance function of your business, so if you get that, great. However, you’d be surprised how common it is for the duties tied to these two roles (and others) to be very misaligned with excepted responsibilities and skills. We want to clear that up as both are crucial to your growing business.
What is a Bookkeeper and What Do They Do?
A Bookkeeper is tasked with recording and maintaining financial transactions such as sales revenue, expenses, and purchases. These professionals record these financial data into ledgers and financial software such as QuickBooks Online. Bookkeepers are usually most sought after by small business owners to assist with financial management tasks. A good bookkeeper should be able to perform the following tasks:
Record expenses, sales, accounts receivables, and accounts payable.
Reconcile bank statements to detect any accounting errors, achieve accurate balance, and record the reconciled bank statements in your accounting system.
Paying bills: After recording the purchase transactions, the bookkeeper is responsible for ensuring that bills for supplies and inventory purchases are offset.
Sending invoices: Bookkeepers prepare invoices and send them to clients so that your business can receive payments on time.
Organizing and maintaining various documents such as purchase receipts.
You should expect that a good Bookkeeper or a Junior or Staff Accountant to provide you with basic monthly financial statements such as income statements, cash flow statements, and balance sheets. However, you shouldn’t expect your bookkeeper to perform the following tasks:
Provide guidance on how to improve your finances
Analyze your financial results
Create financial projections of profit or cash
Make decisions about the financial directions that your business will take
Making such decisions is where a Strategic CFO comes in.
First Things First, What is a CFO and What do They do?
A CFO is the Chief Financial Officer of a business. As such, a CFO will focus on your financial strategies and overall financial management. But what makes a strategic CFO? A CFO can be a pragmatic strategist by addressing vital uncertainties, constraints, and performance issues and taking tangible, realistic actions geared toward moving the company forward. The CFO accomplishes this by performing the following tasks:
Developing strategies and detailed plans for achieving your business financial goals: It is imperative that CFOs up their game strategically. A CFO’s development strategy should entail performing tasks such as assessing the business environment, confirming the objectives of the business, identifying the resources needed to attain these objectives, and then designing ways of achieving them.
Providing comprehensive guidance to help you make financial decisions: A good CFO should assess the market conditions, check the viability of different financial investment projects, and advise you whether to invest in them.
Preparing annual budgets and financial forecasts: The CFO should be able to create annual budgets that make a baseline to compare actual results to projected results, determine how the results vary, and come up with ways of remedying the variances, especially if they are negative. Also, they should prepare financial projections that tell you whether the company is heading in the right direction and the expected income that the business will achieve in the future. These budgets and their activities should also align with your greater business goals for that year and beyond. Learn more about strategic budgeting here.
Measuring and improving financial performance: They should use different measurement metrics such as current ratio, quick ratio, operating cash flow, return on equity, accounts payable turnover, EBITDA & EBITDA growth to measure the financial performance of your business and develop ways of improving the performance.
Maximizing profits: The CFO should perform tasks such as controlling costs, improving productivity, and analyzing the pricing strategies to help you maximize your business profits.
Assessing and minimizing financial risks: Suppose a given project is not doing well financially as was projected, the CFO should be able to establish exit goals, evaluate exit readiness, promote exit options, provide analysis of the value of exit options, and execute a strategic exit plan. You can learn more about exit planning here.
Managing cash: When it comes to cash management, the CFO is tasked with figuring out how to make payrolls and ensuring that the business does not run losses. Most CFOs manage cash challenges by focusing on cash outflows and stemming the amount of money that leaves the organization.
Establishing policies and procedures that ensure smooth financial operations: Your CFO should create accounting and financial processes, procedures, and policies that clarify roles, authority, and responsibilities that help align your F&A operations with your financial goals. They should also understand the scope of financial risks that an organization faces and develop mitigation strategies against these risks.
Raising capital: A CFO should be able to source investors, shorten the time required to raise capital, ensure that you get the best investors, and negotiate the best price and terms for the equity.
Handling mergers and acquisitions: For companies selling or acquiring smaller businesses for growth, a CFO plays a crucial role in the merger process. For starters, they are the ones who create a transactional plan and maximize the synergy with the potential acquisition targets. They also ensure that the integration between your company and the company you’ve merged with is smooth.
Managing relationships with shareholders, lenders, and investors: CFOs are also tasked with ensuring smooth relations with various parties such as shareholders, lenders, and investors. They do this by reporting the financial position of the business or paying dividends and loans.
Overseeing all accounting and finance staff and coordinating activities among them: A Chief Financial Officer is responsible for controlling the financial activities of a business and coordinating the activities of accountants and financial managers to ensure that they are geared towards ensuring that the company attains its financial goals.
As we noted earlier, if you own a small business or a startup, hiring a bookkeeper would be a smart move. The Bookkeeper will help you keep accurate records and ensure that various transactions, such as cashing checks to pay vendors, are handled on time.
However, after your company has grown exponentially, you’ve hired more employees and attracted more clients. Maybe you’re in the stages of making the next big move like an exit strategy, PE/VC investment, M&A, or hypergrowth to an IPO; then it might be time to include a CFO position within your finance functions.
Given that your Bookkeeper was the one handling your finances during the growth period, you may be tempted to elevate them to a Controller or CFO position. Frankly, that wouldn’t be the most advisable move. For starters, the Bookkeeper or any other lower-level accountant will now be well in over their head. Moreover, given their lack of or limited knowledge on the responsibilities of a higher level and strategic financial position, like a CFO, they won’t be able to provide you with accurate and relevant information on time, if they do this at all. You, therefore, won’t likely get the accurate or deep visibility and analysis needed to understand how well your business is performing financially.
So, does that mean your Bookkeeper will be unable to perform the tasks of a CFO because they are incompetent? Not at all. While this person may be a stellar Bookkeeper or Staff Accountant, performing the tasks of a senior financial officer such as a financial Controller or a CFO is a different beast altogether. Sure, they all perform the accounting and financial functions for the company, but that doesn’t mean that a Bookkeeper’s experience prepares them for senior financial position rigors, challenges, and responsibilities.
That said, there are instances when you can promote your Bookkeeper to a CFO or a financial Controller. You should only take that step if they have the specific accounting, management, finance experience, and applicable degrees needed to be a CFO. Tasking them with the CFO job with limited or no qualifications is unfair to them and puts your company’s future in jeopardy.
In What Ways Can Your Business Benefit from Hiring a CFO?
While most small businesses benefit from having a CFO or Controller on their accounting and financial management team, not all of them need those roles on a full-time basis. Moreover, hiring a CFO on a full-time basis is costly. According to Salary.com, hiring a full-time CFO or Controller employee costs $170-$350K per year in California. As such, fractional CFO services is a more cost-friendly option for small businesses that need strategic financial guidance on a part-time basis. Opting for fractional services ensures that you avoid hefty salaries, bonuses, benefits, and employers’ taxes that accrue from hiring a full-time CFO.
Most business leaders usually question whether they need one or the other, or both a CFO and a bookkeeper? Well, the question you should be asking yourself is how much your business is suffering or open to unforeseen risks because of not having a proper financial management team?
It would be best if you had a bookkeeper if you’re questioning the quality and meaning of numbers in your QuickBooks. That way, you get to have more time focusing on the core functions of your business. However, if you and your management team are looking at your numbers and using those figures to make data-driven business decisions, yet you’re not sure whether your operations are running well, then you need a CFO.
Whatever your answers are, you have plenty of options to choose from. One excellent choice you can make is partnering with an outsourced accounting and finance team that has the mindset of solving your pain points while helping you meet your current and future accounting and financial objectives. They can also support you in building a roadmap to reach big business goals, taking your business from point A to point B and beyond.
There are numerous reasons to hire a comprehensive accounting and finance team. Some of the reasons why many businesses come to us include the fact that they are experiencing exponential growth, rapid change, preparing for a significant transactional event, or need better management, reporting, and improved visibility in their businesses. They may realize that maintaining the status quo or operating on gut feelings without access to solid, reliable data hasn’t allowed them to grow and improve their businesses, and this is where we swoop in.
Our comprehensive solutions allow for greater scalability and flexibility while your company is experiencing periods of growth or change. Working with Signature Analytics provides all clients with full access to your immediate team and anyone on our staff or within our partner network who can add value or solve problems for your business. Your staff gets the benefit of having the additional support and training they might need, and you reap the rewards of having excellent accounting and financial leadership and expertise joining you at the table. Book a consultation to learn more about our services.
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Managing the accounting function and financial reporting in a small or medium-sized business is an enormous undertaking for a growing team. Outsourcing your accounting needs gives you expert-level financial service and support to achieve your business goals.
When you identify the need for a partner in your financial department and begin the accounting outsourcing process, your business agrees to let a team of trusted experts come in and help you evaluate everything you currently do. Doing this can maximize your company’s potential whether you’re in a growth or transition period.
What does an outsourced accounting team do?
The experts you outsource should help you define, develop, and achieve your business goals. To begin that process, some firms will assess your current situation. For instance, we like to review four major pillars of your business which are your people, processes, technology, and reporting.
We’ll also take some time to outline your business goals. If you haven’t gone through this process before, a good financial expert can help guide you through various Q&A sessions with the company stakeholders.
From there, it’s essential you bring all of those elements together and design not only a roadmap for improving your accounting function, processes, and financial reporting but ensure that the right metrics, analysis, and KPIs are developed in relationship to the overall business goals. Whether that be raising capital, improving profitability, scenario planning, or managing hypergrowth. This is really bridging the gap between the day-to-day and the big picture stuff.
Structuring goal development and building a roadmap
Validating your information and process optimization
Structuring your financial reporting and conducting deep analysis
Managing the day-to-day accounting function
Focusing on business advisory & forward-looking activities
Structuring your company’s financial and overall business goals is an essential first step in creating alignment between your business and your outsourced experts.
Goal development and building a roadmap to achieve them
Although your outsourced experts are accounting and financial gurus, they are new to your business even if they have previous industry experience. To develop business goals, they’ll start by reviewing and understanding your business by doing an assessment.
This may be looking into your:
Industry
Business goals and major drivers
Current business concerns
Immediate needs and priorities
With the combined industry and business knowledge under your outsourced team’s belt, they can begin gathering information and validating your current processes.
Understanding your information and processes
One of the advantages of accounting experts at your business is evaluating all of your current accounting processes and your financial reporting (including accuracy and consistency), so you and your team don’t have to think about it. Additionally, this allows a new team to come in and see things from a fresh, unbiased perspective and make an impact.
The reason they do this is to:
Understand your team’s roles, current capabilities and skills, and development goals
Review and validate your existing information and structure
Perform data clean up to ensure historical accuracy
Validate processes, make recommendations for optimization, and implementing new ones where needed
Refine how they integrate with your existing team and where they need to fill the gaps
After this evaluation, the experts can seamlessly integrate into your company, your current team structure and are then able to set a foundation for accurate, relevant, and timely reporting.
Delivering sound financial reports and analysis
Now that your business leaders have had an opportunity to build trust with the experts and have reviewed their recommendations, the next step is to give you the information you need to make sound financial decisions.
That information is typically provided in the form of:
Expense management
P&L statements
Accounts receivables and payables
Cash flow management and reporting
Month-end closing
Financial metrics, reporting, and KPIs
Business and financial analysis
Board meeting support
Not only will your outsourced experts provide the above reports regularly, but they may also take this reporting one step further by providing business modeling and deeper financial analysis to help you reach your business goals.
This reporting may include:
Utilization analysis
Breakeven analysis
Margin analysis
Client profitability
Annual budgeting & benchmark reporting
Business-specific metrics & KPIs
With this measurable data provided consistently, you will create additional value by taking actionable steps to improve your business.
Supporting your day-to-day needs
Not only do your outsourced experts help you achieve your financial business goals, but they also support your day-to-day accounting and financial operations.
Some of that support includes:
Payroll processing
Manage A/R and A/P
Month-end close
Workflow documentation
Staff mentoring and supervision
Inventory process development and setup
Bank and credit card reconciliations
Whatever daily accounting operations help your business desires, your outsourced experts are there to ensure everything is getting done on time and there’s a clear delegation of duties and responsibilities, so you don’t have to.
Why would you need to outsource?
Outsourcing your accounting may be a need because of:
rapid company growth
cashflow has become a challenge
you’re not getting the reporting you need
you may have just lost a valuable member(s) of your financial department
you’re not quite ready to take on the financial risk of employing a full-time accountant
you’re having issues getting financial backing from a bank or investor
These are all valid reasons. Whatever the case is, enabling expert accounting, financial, and advisory help in your business – takes some of this burden off your plate. This team truly partners with you and your business leaders so you can focus on other areas of your business.
It’s a classic case of allowing you to start working on your business again instead of working in it.
Outsourcing for growth
As your revenue increase, so do your daily business demands. As a result, your financial needs or the complexities of your finances will also increase. When you’re scaling your business, it’s often helpful to outsource specific back-office operations, such as your finance and accounting department.
Doing so allows you to hire a team of consultants who specialize in going beyond the numbers and meet your growth needs. As a result, this may include implementing new processes, reporting methods, or technology to match your scaling business needs.
Outsourcing due to turnover
When a prominent part of your financial team, like a senior accountant, controller, or CFO, leaves your business, it can be challenging to fill their shoes immediately, and doing their work on top of your own in the interim could lead to burnout.
Additionally, hiring a replacement may not solve the issues that ultimately led to them leaving the company. Many common reasons we see:
they feel unsupported by management and have no career path
they tend to have too much on their plates and are feeling burned out
they are constantly burdened by either doing too low level or work or even too high-level beyond their skillset
By outsourcing, you’re able to fill these gaps with vetted experts who are in the right role because financial experts hired them.
Even if these employees haven’t left your company, we’re able to come in and provide supplemental support, oversight, training, and career path development for your team.
And as you grow, you may eventually need to hire more in-house employees full-time, and your outsource team will still be to support the onboarding or transition of duties when necessary.
Outsourcing because you desire flexibility
If your accounting needs are becoming more complex, you might find yourself spending a lot of time managing them, taking away from other parts of your business. You may also feel uneasy about taking on the financial risk of building out a finance team or are unsure if it’s the right time to do so or who you should hire next.
By outsourcing to a team of experts, you gain the same benefits of having a full finance and accounting team that you usually see are a larger company; however, you pay for fractional support instead of paying for full-time salaries.
And as the business grows or contracts, so can the flexibility of your team. The model is designed to work for your business based on its needs, unlike a full-time staff or staffing agency.
If your business needs accounting and financial expertise and could use a trusted partner as an advisor, consider outsourcing an ideal solution.
Over the years, we’ve worked with several types and sizes of businesses and have seen so much success using this model – that, in many cases, we’ve made lasting relationships as a result.
Strong leaders are always thinking about the future. Forward-thinking is an essential part of business leadership to guide your employees and steer your company in the right direction.
In uncertain times, it is important to understand many different outcomes that could take place. Trying to build a model based on multiple possible outcomes is challenging. You may find that you need help.
Finance and accounting leaders within an organization frequently need assistance predicting their cash needs, drawing a mental picture of potential profitability, and learning how to make better data-based decisions for the company.
To plan for the future effectively, a leader must develop a financial model whose aim is to forecast a business’s results over a set time frame.
Given the current environment, we recommend creating a nine-month cash flow forecast to support your business through whatever comes your way.
We recommend keeping three possible business scenarios in mind:
Your original plan
A probable case based on current data
The worst case
To help you, we suggest brushing up on those Excel skills to create more elaborate and complex financial models. These models will enable you to modify assumptions giving you the ability to see the outcomes immediately. If you are not an Excel guru, don’t worry, even a simple financial model will provide you with better insights into your business.
3 Scenarios And What They Tell You
The original plan scenario should be your current strategic business plan and budget for the year. If you do not have a budget, you can create this model, as outlined below. This scenario acts as the baseline for the other two scenarios.
The probable case scenario is what you expect to happen based on current information. For some businesses, this could mean growth, and for others, it may mean a reduction in revenue.
The worst-case scenario should depict what the business would look like if revenues drop, are delayed, and/or unforeseen expenses occur. This scenario reflects the most serious or severe outcome. In this scenario, forecasting in this way is critical, so preparations can be made to ensure the business can still operate under adverse circumstances.
The best approach to building these scenarios is to start with the original plan. Your original plan scenario should be the easiest to forecast, and you might already have it if you created a strategic business budget for the year ahead. The numbers used in the original business plan will act as the baseline for creating the other two scenarios.
A quick way to get started building the financial model is to calculate a monthly average of the last 12 months for each expense category. At Signature Analytics, we recommend companies break down their expenses into categories or buckets to understand their business expenses better.
Once you have that data, use this average as the baseline amount for each expense account. Then ask yourself, is this baseline still a reasonable estimate to help forecast for the next nine months?
Depending on your income channels, revenue can be forecasted using the 12-month average. If you have more accurate data, then, by all means, use it. For both revenues and expenses, look back at the same months in the previous year to see if any seasonal patterns or trends should be reflected in the forecast and make adjustments where necessary.
Lastly, if you never created a strategic business plan and budget for the year, there’s no time like the present to get that started, so you are not flying blind over the next several months.
Once the Original Plan has been created, determine what percentages (these would be increases or decreases) of revenue and expenses should be applied.
Manual adjustments can be made to any of the monthly numbers based on knowing future activities within the business. Think through possible disruptions to your employees, your supply chain, and your clients.
Worst Case Scenario
The final scenario is weighing in the negative impact of disruptions to your employees, your supply chain, and your clients. You might approach this as a broad decrease in revenue (15%, 25%, or even higher) to understand how that would affect your business and your liquidity.
Scenario planning should bring to light any warning signs that can trigger major strategic pivots to decrease a company’s risk.
One other helpful tool in scenario planning is to utilize storytelling. The Wall Street Journal reports that “data-driven stories enable a team to picture the various futures the organization might face; strong narratives challenge conventional wisdom and management’s assumptions, but should be logical and plausible.”
Remember, forecasts by nature are not factual; but, having the ability to use available forecasts to develop scenarios can provide some relief.
Final Thoughts:
Simple scenario analysis allows you, as the business leader, to work through the assumptions and influences that directly affect your business. This creative and focused thought process can support you in times of high stress when making thoughtful, yet data-driven decisions for your business beyond that “gut feeling.”
If you need help with creating different financial models to support various scenarios, Signature Analytics has a full staff of CFOs and accounting experts to support you and your business. When you are ready, contact us to get started.
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How utilized are your employees? What percent of their time is being spent working on projects that are not billable to the client? How much is that costing your company in productive capacity? If you do not know the answer to these questions, you could be missing out on potential revenue benefits.
Properly assess how much to invoice clients accounts
Decide what to pay their employees
Determine if they are over or understaffed
Calculating Employee Utilization Rates
The resource utilization rate is a balanced relationship between billable hours and working hours available and is a key metric of employee productivity.
For example, if there are 168 eligible working hours in the month of May and Penny spends 100.80 hours on billable client projects then Penny’s utilization rate is 60%.
Billable Hours / Eligible Working Hours = Utilization Rate
Now let’s say that Penny’s annual salary is $50,000, or $4,167 per month. In the month of May, she spends the remaining 40% of her productivity time on business development efforts (10%) and general and administrative (G&A) tasks (30%). That would mean the company is paying Penny $1,250 in May to work on non-revenue generating processes.
Monthly Salary x Time Spent on G&A (%) = Employee Cost
If this general and administrative time is benefiting the company then it may be worthwhile. Otherwise, this time could be used for other work, clients, or spent attending networking and other events to help grow the productive capacity of the business.
If Penny were to increase her utilization from 60% to 80%, her general and administrative employee cost would decrease to $417 per month – increasing efficiencies AND generating additional revenue.
From a revenue perspective, let’s assume that clients are billed at an hourly rate of $150. At 60% utilization the company is making $15,120 in May; however, 80% utilization would bring in $20,160, or $5,040 of additional revenue. Furthermore, if you have 5 employees who can each increase their employee utilization rate from 60% to 80%, you could generate an additional $25,020 of revenue per month.
Higher Utilization = Increased Profitability
Using Utilization Rates to Guide Business Decisions, A Case Study
Earlier this year, Signature Analytics was hired by a professional services firm in San Diego to provide outsourced accounting services. In addition to performing monthly accounting maintenance and bookkeeping services (preparing financial statements, balance sheets, income statements, cash flow statements, etc.), we put together a Utilization Summary Report so the client would have visibility into their employee utilization rates month over month.
The metrics report revealed that in the month of January the company’s average utilization rate for billable employees was 60% resulting in a $95k loss for the month. In February, average utilization was 63% indicating a consistent low utilization rate for the company. To show how utilization rates impacted the bottom line, we also compiled an “if-then” summary report which revealed that increasing average utilization to 75% would generate a profit of $130k for the month.
Using this utilization percentage information, the company decided to make personnel changes in the month of March that would increase their profitability. This included letting go of an underperforming non-billable sales associate. They also replaced a billable-time employee with consistently low utilization with a new billable employee whose skills capacity could be better utilized by the company. Additionally, the firm set personal billable utilization goals for every employee to help encourage the staff to improve productivity and maximize billable projects and hours.
Following the changes, average employee utilization increased to 76%, resulting in a profit increase of $230k for the month of March.
At Signature Analytics, we have helped several professional services firms use utilization rates to make key strategic decisions that drive profitability. Preparing utilization summary reports and “if-then” analyses are one way we enable our clients to visualize the effect of increased utilization rates. We are also able to show the company key metrics for unbilled general & administrative time by applying utilization rates to salaries and separating these wages on the financial statements. Furthermore, we have helped clients implement time tracking systems – which is the first step in determining utilization rates – and assisted with the development of company policies to ensure time is accurately entered by employees.
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https://signatureanalytics.com/wp-content/uploads/measuring-employee-utilization-scaled.jpg15842048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2021-05-03 03:16:162022-10-21 04:52:28Analyzing Employee Utilization Rates to Drive Profitability for Professional Services Firms
As a business owner, you run the risk of bankruptcy if you’re not on top of cash flow management. A full 82 percent of business failures are caused by poor cash management, according to a US Bank study.
So, is it easy enough to bring in more money than your business is spending? Although it sounds simple in theory, having a positive cash flow encompasses much more than profitability. Even if your company is currently profitable, it is still at risk for negative cash flow. One common example of this is if you have obligations for future payments that you cannot meet because you’ve mistimed incoming funds.
By maximizing your company’s cash flow, you can help your company receive profits faster, meet targets in a shorter time frame, and lower your operating expenses. Wondering how to improve cash flow in your small business? These 10 tips can help you improve cash flow for your company.
1. Anticipate and Plan for Future Cash Needs
Keeping accurate, timely, and relevant (ART) accounting records allows you to build a forecast for your business based on historical results. At the very least, businesses should be reviewing their cash flow monthly.
Being proactive with your cash flow enables you to forecast your anticipated funds and help prepare for historically painful periods or seasonal trends.
For example, if you find that you are anticipating a future need for extra cash, you may want to start talking to lenders about a bridge loan to help pave the way for future financing. Similarly, if you can anticipate large expenses ahead of payout, you’ll be able to plan your other obligations accordingly to avoid cash flow surprises.
2. Improve your Accounts Receivable
By actively managing your accounts receivable, you can stay on top of outstanding invoices and decrease the time it takes to get paid.
One way you can do this is by encouraging customers to pay early. For example, if your payment terms are net 30 days, consider offering a slight discount for customers paying net 10 days.
Are you currently waiting for checks to arrive? Offering a variety of payment options will make it as easy as possible for a customer to pay you, such as ACH or credit card payments. While these options may come with processing fees, getting money faster is better for your business if cash flow is tight and eliminates time & labor spent on collection. These options can help prevent you from stacking up credit card debt to cover expenses.
3. Manage your Accounts Payable Process
Establishing and organizing your accounts payable process will be essential to improving your company’s cash flow. If your accounting department doesn’t already use software to help manage your accounts, it is a good idea to invest in one. Next, you should communicate with your team which invoices are most important so they can be paid first. Remember, do not let unpaid invoices slip through the cracks.
Another tip? Try to get to know your vendors and extend payment terms as long as possible. Most vendors will ask businesses for net 30, but once you build up a positive relationship, they may be more inclined to offer net 45 or net 60. After all, the longer you have to pay, the more time you have to get money in. You can use a simple payment agreement template to help you when creating your financial contracts.
4. Put Idle Cash to Work
Another way to improve business cash flow is by putting idle cash to work. Your idle cash is money that is not earning any income.
Chances are if you have large balances sitting in non-interest-bearing accounts, you can find a better place for them to live. You could consider moving them to an interest-bearing account that may earn .5% or 1% APY. Another option is to invest the money in expanding your business, use it to decrease your debts and lower your interest payments, invest in new technology, or prepay some expenses.
Most commercial banks offer a sweep account, a type of account to help maximize earnings on your income by automatically transferring money from your business checking account to your savings account. The sweeps happen at the close of business each day, and you can set the amount, typically in $500 increments.
Should your checking account dip below your minimum requirement, the funds will be automatically transferred back into your checking account to cover the outlay. This risk-free option makes it easy to build your savings for a rainy day or your next major investment.
6. Utilize Cheap and/or Free Financing Options
If you are looking to invest in your company through low to medium-cost purchases such as upgrading your computer system, buying new furniture, or replacing your company vehicles, you should take advantage of financing options that have low or no interest for the initial period of the loan.
Using this strategy for a business loan will help you save money by cushioning the cash hit to your business. If you pay off the full loan upfront before the interest rates kick in, you will save even more, therefore, making the most of your investment.
7. Control Access to Bank Accounts
To maintain positive cash flow, it is crucial to protect your assets. The best way to eliminate fraud and unauthorized use of your company bank accounts is to make sure the proper safeguards are in place.
Common safeguards include keeping the number of people who can access these accounts to a minimum, securing your IT infrastructure, frequently updating passwords, protecting your credit and debit card information and bank accounts, and using a dedicated computer for banking.
8. Outsource Certain Business Functions
It’s not necessary to hire full-time employees for every business function. You should evaluate your business needs and identify areas where it may be more cost-effective to outsource. IT management, human resources, accounting, payroll, and marketing are all functions that could be outsourced.
There are many firms, including Signature Analytics, that specialize in providing experienced professionals to handle specific business functions and manage cash flow issues. Outsourcing can save your business money, offers a flexible staffing model during the ebbs and flows of your business cycle, and it can also increase your efficiency.
9. Renegotiate Existing Service Contracts
Another tip to increase business cash flow is to review service plans and contracts regularly. Start by looking at your internet, phone bills, copiers, software support, and janitorial/building maintenance contracts to pinpoint opportunities to save.
Improved technologies and increased market competition have driven prices down on many services, so it’s worth taking the time to shop around for a better deal.
10. Maintain a Weekly Rolling Cash Forecast
A rolling cash forecast is a good practice for improving cash flow overall. You don’t need expensive programs to do this; Excel will easily allow you to project a weekly rolling cash forecast. You should include all estimated inflows, such as customer receipts, and outflows, such as vendor payments and payroll. Record this data on a weekly basis at least.
Your rolling cash forecast will help you plan staffing needs, commit to new vendors, and ensure funds will always be available to make payroll and vendor payments. As a bonus, your forecasting will help you estimate and understand your company’s sales cycle.
By implementing these strategies when managing cash flow, you will quickly get the upper hand on your company’s finances and learn how to increase cash flow within your business — so you will soon reap the benefits.
At Signature Analytics, we have a team of expert accounting and financial professionals including accountants, controllers, financial analysts, and CFOs; all dedicated to providing the best level of service at a price that makes sense for your business.
For additional assistance with cash flow management, developing detailed financial projections, or identifying capital requirements, contact Signature Analytics today for a free consultation.
https://signatureanalytics.com/wp-content/uploads/tips-to-improve-cashflow-scaled.jpg13562048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2021-04-15 10:01:072022-11-09 18:03:5810 Tips to Help Improve Your Company’s Cash Flow
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.
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.
https://signatureanalytics.com/wp-content/uploads/when-you-should-consider-outsourcing-scaled.jpg13652048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2021-03-01 20:15:272022-11-11 16:54:16When Should You Consider Outsourcing Your Accounting Operations?
Presenting financial information in an easily digestible format is essential when communicating with external stakeholders such as lenders, investors, and other strategic partners. These communications are vital to the long-term success of a business; however, it can be a struggle for many small and mid-size businesses. To help, below are three keys to successfully communicating the financial state of your business with external stakeholders.
#1 Be Concise
The easier it is for an external stakeholder to interpret results, the easier it will be for the company to achieve its desires from that stakeholder.
Banks. If you’re seeking a line of credit from a bank, it is important to distill the financial results of the company into a simple format that shows them they should lend to you. They want to know you have the cash to pay your bills. They want to know you have proven you can collect from customers. They want to see profitability that is consistent and stable. If any of these things require explanation, provide it.
Investors. Investors want to understand why and how your business can generate a return for them and provide comfort that their capital is reasonably safe.
Strategic Partners. A key strategic partner will want an understanding that they can commit resources to work with you in a manner that will be fruitful.
These stakeholders do not want to weed through a book. Furthermore, simply exporting your income statement and balance sheet directly from your accounting software is not enough. Summary narratives, graphs, charts, and reports can be very effective as they will enable the stakeholder to better interpret the financials of the business, as opposed to allowing them to develop their own conclusions.
At the same time, you do not want to show too much or too little financial information. Voluminous information will likely go unread. While not providing enough information can result in the investor or lender making incorrect assumptions about the business. If more detail is sought, it can be provided.
By making it easier to understand your business on paper, you are far more likely to get the answer that you want.
What is the business is trying to accomplish with the external stakeholder? You will have a higher rate of success if you anticipate and address the stakeholder’s questions upfront.
For banks, you need to clearly communicate why the money is being sought from the bank. What are the uses of the funds? For example, oftentimes an expansion won’t just require capital to purchase equipment, but could also necessitate additional staff, office space, etc.
The same applies to investors. Can an investor interpret in a quick read the high-level goal(s) the business is trying to achieve? Also, what are the risks involved for the business?
It is also best to take objections off the table proactively. If new competition is coming to the market, what is your plan to combat it? If opening a new market, what makes you think you can be successful there? Laying out potential obstacles tells the stakeholder that you have thought about them and gives them confidence in your business.
#3 Be Honest and Direct
This can often be the toughest of all. No one likes to share bad news. Far too many businesses choose not to communicate at all when this happens; however, when things are not going as well as planned, this is perhaps the most important time to communicate with external stakeholders. Don’t hide a bad quarter; explain what happened and what you are doing about it. Again, this demonstrates that you have a handle on the business and that there is no cause for undue worry. Every business will experience some hard times, but having your key allies informed and confident in your abilities will greatly enhance your ability to weather the storm.
We Can Help
Presenting financial information in an easily digestible format is essential in communicating with external and internal stakeholders. If you’re seeking an increased line of credit, looking for potential investors or strategic partners, or want to improve your internal reporting to management and/or board members, Signature Analytics can help. Contact us today for a free consultation with one of our CFOs.
https://signatureanalytics.com/wp-content/uploads/communicating-company-financials-to-stakeholders-scaled.jpg12832048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2020-06-05 06:00:222022-10-21 04:52:31How to Effectively Communicate Your Company’s Financials with External Stakeholders
As any good business leader knows, planning for the future is a necessary step to help ensure the company heads in the right direction and reaches success along the way. Now more than ever before, this practice is a necessary step to even ensure its survival. Part of forward-thinking is reasoning through different paths your company could take and visualizing what outcomes would come from those directions.
Being able to draw up a mental picture of this future can enable a leader to make the right choices without spending unnecessary time or money going in the wrong direction. To plan effectively, the best place to start is by creating a plan, a type of financial model, to make predictions on your business’s results over a specific period.
This strategic thinking is what the industry refers to as scenario planning, as Forbes defines “alternate futures in which today’s decisions may play out.” By planning through your scenarios and stress-testing them, you should ultimately end with a clear direction that is best for your business to take. Below, we will walk you through how to scenario plan and then how to effectively stress test your scenarios.
How To Start Scenario Planning
To effectively navigate the scenario planning process, you must first create a cash flow forecast to support your business. With your numbers in place, you will be better able to make accurate predictions to take your company in the right direction. We suggest starting here or here to learn more about this process. Once you have a better understanding of your business financials, then you can dive into the three types of models for scenario planning explained below.
Here Are 3 Models For Scenario Planning
Original plan – This should be the most straightforward scenario to create, and it utilizes your strategic business plan and budget for the year. The original plan scenario is a jumping-off point for the two scenario types below.
Probable case – Given the information you currently have, you should have an expectation for your business’s future. Your expectations could be positive or negative, depending on how you are fairing the current economic climate. Companies with more seasonality should refer to the quarters in the past to draw up a better picture.
Worst-case – As the company leader, you know your business better than anyone else. If revenues were to decline and unexpected expenses were to arise, how would those happenings affect your company? The worst-case scenario takes all of the “bad things” that could happen into account, so there are no surprises. Forecasting in this way allows you to take action now so your business can survive later.
Once you have developed each of these scenarios, the next step in the process is to stress-test them to ensure you know what will or won’t work for your company. If you are looking to first dive deeper into each of the individual scenarios, you can read the blog linked below.
Knowledge is power, and with your scenarios mapped out, you can feel more confident as to the direction your business is headed. However, what happens when the unexpected happens? When what you planned for and accounted for may no longer be valid options? By stress-testing with a few proven fundamentals, you can discover any shortcomings or weak points in your business strategy to ensure it is executed to the best possible ability no matter the pulse of the economic climate. Ask yourself and other company leaders involved in this process the following questions:
1. Who Is Your Ideal Customer?
Knowing your primary customer will allow you to allocate resources the right way without being sidetracked. Earmarking funds to multiple types of customers or clients will result in underperformance and less than ideal service. Your ideal customer may change over time, which is ok, but recognize that it may take restructuring to make this happen. For now, focus on one customer and ensure your scenarios cater to them.
2. Who Do Your Core Values Speak To?
Every company is different, and its core values may speak to clients, employees, or investors. Knowing who your values speak to will be necessary when making one business decision over another and having clear company messaging and direction.
3. Are You Tracking Key Performance Indicators?
Not only is it essential to track KPIs, but knowing which KPIs to follow is also critical. Creating a company scorecard is helpful so long as there are specific variables you are reviewing consistently. We recommend tracking six key performance indicators which you can read more about here. Remember, tracking too many variables will drive out innovation, so go with a less is more mentality here.
4. Are Employees Willing To Help One Another?
To effectively build an organization like a well-oiled machine, all the parts need to work well together. In business, this means that while your employees will have individual goals, they must be willing to help one another to drive strategy, collaboration, and communication, all while working toward reaching company goals.
5. What Unknowns Keep You Awake At Night?
Being scared or worried about the unknown is nothing new—as every business leader experiences these feelings. Take a tip from other failed business strategies, as those leaders made assumptions about the future and were wrong. The business strategy you are working so hard to create will not be a blanket strategy you can use for the lifetime of your business. To be successful, you must continually monitor the uncertainties that you are accounting for in your scenarios. Try and stress-test your scenarios annually to address changes and ensure you are successful in any economic climate. Depending on the industry your business is in, you may need to adjust this timeline more frequently.
Remember, scenario planning alone will not help you find an effective strategy for your business. Strategically thinking through and testing your plan to see where the weaknesses and strengths lie will be vital to come to the right decision. Even after all this planning, remember that life can still throw some unexpected curveballs (COVID-19 anyone?), and adjusting to those unforeseen circumstances will be necessary. While this may feel like a lot of information, this is just a starting point.
If, at any point in the process, you or your team feel overwhelmed with financial reporting, business strategy, defining your KPIs, or need some guidance when facing the difficult business decisions that lie ahead – please reach out to our team of experts.
The Signature Analytics promise is to help with all of these areas and go beyond the numbers to improve your business performance and assist you in achieving your goals. Contact our team of experts for business and financial analysis and any other questions you may have during this challenging time.
https://signatureanalytics.com/wp-content/uploads/headway-5QgIuuBxKwM-unsplash-scaled.jpg13652048Tina Mummhttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngTina Mumm2020-05-01 18:19:592022-10-21 04:52:31Important Questions To Ask When Planning and Testing A Business Strategy
If you’re not familiar with “what-if” scenario analysis, it’s time you familiarize yourself and jump on board. This type of planning can reveal unanticipated difficulties that can destabilize a project, making it a valuable analytical tool.
By helping you prepare for such adversities, financial scenario planning gives you a proactive edge on the situation. What-if analysis might seem like a daunting process, but it will help you make decisions to help your company thrive – or become more prepared – especially during more undesirable times.
Why You Need To Plan For What Ifs
What-if scenario planning can give you a distinct edge over the competition because your company will be prepared for a quick response and viable solution for problematic situations.
Once you incorporate scenario planning into your operations, you will have strategies on hand for virtually any situation.
For example, let’s say you want to see how a supply delivery at a later date will affect your project costs. You create a scenario around this idea and add in the appropriate circumstances that could impact your business, whether positive or negative. Running through the scenario will show you the potential outcome, and help you determine the best course of action.
Financial scenario planning is also a vital part of the business decision-making process. It helps you figure out the best and worst-case scenarios so you can anticipate possible profits or losses.
What are the Three Stages of Scenario Planning?
When you’re planning for various financial scenarios, you will generate several probable future contexts for your company, the industry you are in, and also the economy. These possibilities will include individual scenarios, like variables such as operating costs, product pricing, inflation, customer metrics, and interest rates.
Typically, you will begin with three separate scenarios:
Base case scenario: You can use your data from the previous year in this situation, as this is a good predictor for the next twelve months. If you saw growth within your company during the last year, say 10%, you can assume the same growth rate will follow in the next year.
Best-case scenario: The best-case is to think outside the box and try to imagine a situation in which your sales projections turn out as you hope over the next year. For example, holding onto your current customers, adding new ones, or making an acquisition. Although you are creating a best-case scenario, the data you use should still be realistic. For example, if your company is experiencing an 85% monthly retention rate, you could increase it to 90% for the sake of this scenario.
Worst-case scenario: The worst-case will prepare you for potential problems. It can help you avoid issues or at least prepare for them by creating an action plan.
It’s crucial that you build scenarios into your company’s financial model so you have a full understanding of how different variables can impact your company. Here are some steps you can follow to get started with financial scenario planning:
Make a list of all the potential occurrences you want to develop scenarios for
Flesh out the details for each scenario
Make sure to include the three stages for each scenario: average case, best case, and worst case
Make sure you are consistent throughout the planning of each scenario
What are the Benefits of Scenario Planning?
Analyzing your company and predicting its future is a risky business. Financial scenario planning can give you the edge on different possibilities and you and your company can benefit in many ways, including:
Planning for the future: Scenario planning allows you to give investors a preview of the potential returns and risks involved in future investments. Your goal is to increase your company’s revenue, and the best way to do so is by using up-to-date calculations.
Avoiding risks and failures: Financial scenario planning can help you avoid making poor investment decisions. As you are taking the best and worst possible case scenarios into account, you can make more informed decisions.
Keeping you proactive: By being proactive and staying on your toes, you can minimize potential losses from factors beyond your control. Creating worst-case scenarios allows you to assess possible damage and avoid these circumstances, or at least prepare for them.
Enabling you to project investment returns or losses: Financial scenario planning gives you the tools to calculate potential investment gains and losses and provides you with measurable data. You can use this data to maximize the outcome.
A CFO is an ideal person to help with financial scenario planning. They can play an important part in this process because they are a successful executive who is an expert in strategic financial management. As an expert, they are responsible for managing short-term assets and available resources and developing strategies to leverage these resources.
Furthermore, a CFO should be able to maintain the company’s long-term financial health and profitability. A good CFO will analyze the cash flow, income statements, and balance sheet to monitor the company’s well-being while simultaneously making the most of the assets.
To do this, they need to have certain information at hand. Financial scenario planning can help them acquire this information by answering the following questions:
How can the company combine short and long-term assets to maximize profitability?
How can the company best finance upcoming projects?
How can the company maintain a healthy balance between debt and equity?
How can older assets generate future revenue?
What are the Benefits of a Fractional CFO
If you’re running a small- to medium-sized company, you may believe hiring a CFO is out of the realm of your budget. However, this is not the case. If you hire a fractional CFO, you can reap all the benefits of their financial expertise without it costing a small fortune. Here are a few of the benefits:
You’ll save money because you won’t have to pay a salary or benefits
You’ll save time because you won’t have to advertise, interview, or train
You can ensure that you have a CFO who is qualified and experienced
No matter how effective your company is, it won’t be able to maintain steady growth phases if future projections and developed strategies are not made for when issues arise. Your business potential relies on your ability to evaluate your company honestly daily. This ability includes the evaluation for ways to improve efficiency, minimize waste, boost performance, and develop solutions for how your company can succeed through positive and negative economic conditions.
Hiring an outsourced CFO can make a big difference to your company when it comes to these endeavors and securing a financial plan to ensure you’re making the right business decisions.
Having an experienced financial business advisor to run through scenario planning and caution you of the possible outcomes can make the difference between a successful organization and a failing business.
If you are considering hiring a fractional CFO, contact Signature Analytics today. We can provide you with qualified and experienced CFOs, regardless of your industry.
https://signatureanalytics.com/wp-content/uploads/adults-coffee-colleagues-1323592.jpg12662048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2020-03-15 13:50:252022-10-21 04:52:34Why You Need Financial Scenario Planning for What Ifs
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.
Have questions about our process? Contact us today for a free consultation.
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As a business owner, financial data is critical to your success — but only if you know how to interpret the meaning behind the numbers correctly. Most owners or leaders within an organization rely on the aid of an accounting team to accurately analyze and organize financial data. Still, when it comes time to make a big decision, it’s up to you to do so based on the gathered information.
There are at least three primary financial statements your accounting team will (read: most definitely should) be presenting to you regularly: income statements, balance sheets, and statements of cash flow.
With a solid understanding of each financial statement, you can unlock powerful insights to help you compete more effectively in the marketplace, achieve better terms from vendors and suppliers, and offer accurate projections to both internal stakeholders and lending companies alike.
Income Statement
The income statement (also called a profit and loss statement or P&L statement) measures the profitability of your business during a specified accounting period. This statement assesses all of your business’ revenue and expenses, and then reports a net profit or net loss.
By industry standards, this is the most influential of the three significant statements. This report shows where the money is allocated and breaks down business costs into categories.
Importantly notated are costs directly related to goods and services. It also calculates your company’s earnings from multiple viewpoints, reporting not only the net earnings (your bottom line) but also an assessment of the business’ productive efficiency before the impact of taxes and financing.
It’s helpful to compare multiple income statements from different accounting periods to monitor whether your business is becoming more or less profitable over time — allowing you to adjust your spending and production processes accordingly.
Balance Sheet
The information on the balance sheet is monumentally more valuable when viewed in conjunction with your income statement. For instance, you can use the data from the balance sheet to determine how many investments are required to support the bottom line shown on your income statement.
While the income statement focuses on one specific accounting period, the balance sheet shows a snapshot of your overall financial health on a particular day by using a simple equation: liabilities + equity = assets.
These factors give you an idea of what the business owns (assets), what it owes (liabilities, including short-term expenses and long-term debt), and how much capital shareholders have invested (equity). As the name suggests, the two sides of the equation in your balance sheet should balance out.
The cash flow statement does just what the name implies — it reports on the flow of cash into and out of your business. Unlike the income statement, which breaks down earnings and expenses into more specific categories, the statement of cash flows focuses on the overall amount of money coming in (inflow), compared to the amount of money going out (outflow).
To find this data, it takes precise calculations using the following equation: starting cash balance + cash inflows – cash outflows = ending cash balance.
Cash inflows include sales, loans, and accounts receivable collections. Alternatively, cash outflows include equipment costs, inventory, and expenses paid. The statement of cash flows presents the most transparent view of a company’s cash variation. In other words, what caused the balance in your bank account to increase or decrease.
Even Harvard Business School agrees that the number one finance skill a leader needs is an understanding of their financial statements and you can’t argue with Harvard right?
Comprehensive knowledge of the financial side of your company will be incredibly helpful when it comes to making smart business decisions.
If your accounting team needs help or are not sure how to gather the information for these reports, have them contact us. Our expert team of accountants and business advisors are here for help in situations just like these.
The beginning of the year is anything but dull, but after the holiday celebrations, it’s time to settle down and get organized for tax season. While employees might not have taxes on the brain until April, businesses, and employers are busy preparing early on. It’s crucial to start this process sooner rather than later, so no paperwork is forgotten. One essential form to remember is 1099.
What Is A 1099 IRS Form?
A 1099 IRS form is a record of a person or an entity providing payment to someone. There are several types of IRS 1099 forms, such as 1099-MISC, 1099-INT, 1099-CAP, and more. These informational returns are used to record payments to individuals or partnerships for interest, services, bonuses, and other types of income paid during the year.
Please note that business owners must file 1099 forms with the IRS and send a copy to the individual each year by January 31st, the same as the W2 filing deadline.
If you have convertible notes payable that accrue interest during the year, you must file Form 1099-INT
If you paid dividends to inventors, you must file Form 1099-DIV
If you forgave an outstanding debt during the year, you must submit form 1099-C
All amounts paid to law firms must be reported on a 1099, regardless if the law firm is categorized as a corporation and even if the amounts are less than $600
Here Are The Accounting Best Practices for 1099s
Good recordkeeping is key to fulfilling this requirement and meeting the January 31st deadline:
Payments to vendors should be categorized in your books and records by vendor and not merely by category or expense line item.
Small businesses should always request a form W9 from any vendor with whom they conduct business. A W9 will tell you if the vendor is a Corporation (excluded from 1099 requirement) and what their federal tax ID number is (needed for the 1099). Read More:Financial Tips From Successful Leaders
These Are Common Mistakes To Avoid
Below are some examples of mistakes commonly made by small business owners when it comes to 1099 rules:
Classifying employees as a 1099 vendor when they meet the IRS definition of a W2 full-time employee.
Giving expensive gifts or prizes to sales representatives or others without issuing a 1099 for the value of the gift.
Not filing a 1099 for interest accrued on convertible notes or other bonds.
Not keeping proper records or requiring a W9, so when it comes time to prepare the 1099s they are filed late due to trying to collect all the necessary data from each vendor.
Do not wait until the last minute. Reduce the January time crunch by reviewing your vendor list with your accountant in December if you can remember. Find and address issues early and make sure you have a plan to get the 1099s filed by the January 31st deadline.
Signature Analytics Can Help
If you need help preparing the data necessary to complete your 1099s, have questions about who you should be sending this form to, or any other financial paperwork inquiries, please contact us today.
https://signatureanalytics.com/wp-content/uploads/lauren-gray-Ib2pdxR8fY0-unsplash-scaled.jpg13662048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2020-01-02 12:03:522022-10-21 04:52:36Tips And Tricks For Filing 1099s: The Deadline Is In January
The chief financial officer (CFO) is an executive role that oversees or executes cash flow and financial planning, among a myriad of other financial efforts within an organization. While a CFO of the future has multiple duties, it is imperative to the company’s health that the person within this role reports accurate and up-to-date figures.
While the role of CFO arrived during the early 1960s, it’s clear there is incredible value in position and therefore isn’t going away anytime soon. There are noticeable trends within the role’s evolution, enforcing the importance of understanding the nuances of expectations in decades past.
The Traditional CFO
In the past, the CFO role was very technical and somewhat isolated from the rest of the company. The path of becoming a CFO typically began with an accounting or finance background. Typically, requirements would include an MBA, MFA, CFA, or experience as a CPA. From there, it would have required working up the corporate structure and serving long periods at the desk. This numbers-only role required the chief financial officer to manage financial planning, risks, and reporting, along with record keeping. Likely, they would report directly to the CEO but may have assisted the chief operating officer (COO) with matters relating to the company’s budget.
However, there has been an increasing amount of pressure put on the CFO due to a competitive and continuously changing business world. Just a few examples of these pressures include new technologies, globalization, emerging markets, and business models – all that affect how to reach customers and win deals. Amid streams of corporate scandals and continued backlash from the Great Recession, these instances have caused the role of the CFO to evolve, requiring a brand new set of skills.
The CFO role has continued to change, especially in the last few years. More and more companies want to add broader skill sets and leadership abilities to their management teams and are looking to future CFOs to help. As the financial gatekeeper at the company, they are being asked to evolve and expand whether they have been in this C-suite level role for years or are newly appointed. Meaning any aspiring CFO should expect to add some new tools to their belt to get the job done right.
It is imperative to have the unmatched financial expertise to rise to the executive level within an organization as a CFO. This expertise can aid in the company’s success in sales, technology, marketing, and operations.
Depending on the breadth of the business, the CFO may also be required to oversee particular functions that generally may have landed outside of their scope. Such duties include IT and legal. Therefore, the expansion of the role requires the CFO to be financially savvy, but it also means they will need to tap into their operational and visionary sides as well. More on that to come.
Why a Business Needs a CFO
Naturally, a valid question is why a business needs this kind of role. Well, bringing on a CFO at the right time can elevate a business’ profits and, ultimately, its success. As they champion the most up-to-date financial information for the company, they are an incredibly powerful asset to have on any team. By having the most accurate information at the right moment, a decision-maker can feel confident in making better business decisions. These choices include investment type decisions around such things as increasing staff, budgets, acquisitions, or even purchase or leasing of new equipment.
There is an incredible value of having a CFO who truly understands the ins and outs of the business. It is with this depth of knowledge that they can make a difference and hopefully enact positive change and growth within the company.
The importance and breadth of the CFO’s role continues to grow, shaping a future CFO looks very different from that of years past. Meaning, the Chief Financial Officer [of the Future] will need a wide range of skills and capabilities to prepare for the opportunities and challenges ahead. Whether you are a current CFO or a future finance leader, continuing your personal and professional development will be critical for success.
Most importantly, you don’t need to let go of your current CFO to attain the CFO of the future. If they are willing and eager to learn the tools required to take your business into the future, then train them. However, if your company has yet to hire a CFO or has been looking to replace the current employee, then be sure to look for these qualifications in your applicants:
Broad business knowledge
Operational experience
Leadership qualities
Strategic mindset
Strong communication skills…and all the traits mentioned earlier!
Remember, for a CFO to be successful in the future, they will need to be a leader in a workplace that is continuously changing. They must be more than “the finance guy,” “the numbers gal,” or “the Excel wizard.” As technology grows and cybersecurity becomes more of a threat, the CFO must be adaptable and utilize the technologies that will help their company to grow. If the company’s CFO can understand that communication will get them farther than keeping their nose in the books, you may have a modern CFO on your team.
If your company is searching for a CFO, Signature Analytics can provide part-time CFO’s of the future at a fraction of the cost of hiring a full-time CFO. Not only is this a budget-friendly option for any company, but a part-time CFO can help to refine policies and procedures, and even implement better tech tools for the accounting department to utilize. To find out more about our fractional modern CFO services contact us today.
https://signatureanalytics.com/wp-content/uploads/amy-hirschi-izxMVv2Z9dw-unsplash.jpg13652048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-10-24 13:41:202022-10-21 04:52:37The CFO of the Future: Why You Need One On Your Team
CEOs don’t have many people they can turn to when they need advice with financial management, honest answers, and space to discuss doubts about their company. That’s why they need a good chief financial officer on hand.
Just like a quarterback directs his team to score as many points as they possibly can, a CFO guides the CEO to make the most revenue from the company.
Of course, not all CFOs are created equal. The right person must earn the trust of their CEO for the relationship to work both ways. To do that, a CEO must look for certain skills and competencies when they’re hiring a financial executive.
What Key Skills Do CEOs Need from Their CFO?
A CEO needs a CFO who has many vital skills to help grow the company. When it comes to breaking down the skills and abilities that CEOs require most from their CFOs, they generally fall into two categories. Those categories are hard and soft skills, both of which we will outline below.
Hard Skills
Hard skills come directly from years of training and experience with business finances and strategic planning.
Tracking and analyzing cash flow management: This is one of the CFO’s most important roles, and it is essential for the CEO. A CFO is trained to assess cash flow and monitor the company’s finance and accounting department to instantly spot — and fix — any problems.
Data and analytics management: Gathering and interpreting the company’s financial data raises the CFO from an accountant to an analytical strategist. Strategic use of financial data enables the CFO to keep the CEO informed of the viability of current and future business strategies. The CFO’s strategic ability will transform analytics-based insights into measurable results.
Risk management: The CFO should be highly skilled at risk management to prevent the company from the influence of outside forces such as competitors or inside forces such as bad business decisions. The CFO should make sure that the business model is strong and resilient enough to withstand predictable threats.
Technological expertise: The CFO must be tech-savvy to push business performance to new levels. According to Gartner, global IT spending within the business industry is set to reach $3.8 trillion this year. Meaning the CFO must recognize their role as an agent who drives technological transformation throughout their company.
Financial planning and budgeting: A good CFO has the company’s most current financial data ready to create realistic budgets and short and long-term financial plans. The CFO must also keep abreast of continuous budgeting to stay ahead of changes within the company.
Management of finance, HR, and IT procedures: The CFO should not only be in tune with the management of these procedures, but he or she should also be fully up-to-date with the technologies they are using. Access to this information gives the CFO the tools he or she needs to work across departments and divisions. For example, many CFOs take on budgeting for compensation and benefits as well as IT expenditure.
Soft Skills
In today’s business environment, CFOs need more than financial and analytical skills. They also need to excel at forming and maintaining business partnerships.
Management and leadership of the finance/accounting team: Leadership and people skills are integral parts of the CFO’s function. Leading CFOs have the soft skills required to drive creative thinking and engagement. For this reason, excellent communication skills are a top priority if they’re going to be leaders in a company.
A strategic relationship with the CEO: The CFO needs to be a strategic partner but also a reliable accountability partner to the CEO. Meaning, they continually help the CEO drive progress for the company. The CFO must continually bring reality to the company’s management team, identify and measure the risks of their decision-making, and ultimately make sure that the CEO is accountable for meeting company goals and objectives.
A deep understanding of company strategy: Each company has a unique business strategy based on the size of the business, budget, industry, and goals. An efficient CFO will know the company’s strategy inside and out. This strategic understanding allows him or her to prioritize business tasks and processes for the CEO and advise the CEO on strategies to get their goals while hopefully getting the best return on investment.
An effective decision maker: A top-line CFO has the skills and experience to develop strategic planning and forward-thinking. The CFO must always be ready to implement changes within the company to prevent loss and produce growth. Adaptability is key to good decision making and will build trust with the CEO. At the end of the day, a strategic CFO plays a very crucial role in the CEO’s ability to make more informed and insightful [read: better] decisions, which is crucial during times of economic strain and uncertainty.
If you’re looking for a top-performing CFO but don’t have the time, budget, or desire to hire in-house, Signature Analytics is the go-to resource for outsourced CFOs. We provide professional, part-time CFO services, supplying your company with a Chief Financial Officer who is a leading expert in their field. We’ll match you with a CFO you can trust to provide the following: actionable financial analysis, cash management, forecasting, accurate reporting, high-quality business advice, and company risk management.
Contact us today to find out more about our finance professionals.
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In all industries, Controllers are the people who supervise all accounting functions in a business. These financial experts steer the ship to keep the company’s finances on track. As you can imagine, a Controller has many responsibilities, including:
Supervising accounting teams
Managing and maintaining cash flow of all accounts
Managing controls to ensure assets are used appropriately
Creating the policies and procedures to manage all accounting processes
Providing data for audits
Compiling financial statements and reports
Determining appropriate budgets for the company
Overseeing accounts payable
Preventing fraud or misuse of company assets
In short, a Controller is in charge of managing the accounting department. The right person must have multitasking skills and highly developed communication skills to work closely with business leaders and their team.
4 ways a Controller can grow your business
A professional Controller can help your business grow in several ways, including:
1. Taking accountability for your company finances
Your financial Controller will take full responsibility and accountability for your company’s financial systems. This person is typically so in tune with your finances and business operations that are aware of every number crunched and have a thorough understanding of your business expenses.
A Controller will also be able to explain any fluctuations in your cash flow, strategize your finances, and optimize them. Your Controller will play a big role in every financial decision you make on behalf of your company, from purchasing new equipment to hiring new staff. Also, they will likely be the primary point of contact for your legal, insurance, and banking alliances. With all these major responsibilities taken off your plate, you are left free to do what you do best — further developing and running your company.
2. Finding areas where you could be saving on costs
One of the most critical parts of the Controller’s job is to get to know the business inside out and find ways to improve profitability and budgeting. A proactive Controller will know if your company’s sales are hitting targets, and they will be aware of ways to decrease expenses and improve product margins.
Your company can benefit from a controller who is an expert at finding and launching cost-saving initiatives to increase your profitability and allow your business to flourish.
3. Creating value as a business partner
A Controller who is worth their salt should manage vendor relationships, so the business receives the best available terms and contracts. The right Controller must also feel comfortable to talk to you if they disagree with your company’s spending habits.
If you are patient and listen to your Controller, you will find their opinion not only valuable, but their professional point of view can save you money that can be reinvested in your business.
4. Managing your company data
A financial Controller plays an important role when it comes to managing your company data. If you’re going to invest money in hiring a Controller, you need to understand his or her exact role in this critical area.
Your Controller will not deal with financial data entry but will supervise the process and make sure it’s carried out accurately, efficiently, and securely. Within this role, the Controller should be up-to-date on current accounting and finance technology. This person should always be on the lookout for new and innovative technology to help streamline the running of your accounting department.
When does your Business need a Controller?
Hiring a Controller sounds like a big job — and it is. So, when does it make sense to hire a high-level financial professional? If any of these situations sound familiar, it might be time to hire a Controller:
Your company is growing rapidly, and you need help in making financial decisions, such as evaluating new revenue streams or purchasing a new facility
You need someone to lead your company’s accounting operations so you can spend more time managing your business’s development
You need regular, consistent reporting on your company’s financial position
You want to ensure that your company is fully compliant with tax codes
You need help managing significant amounts of receivables and inventory
What are the benefits of outsourcing a Controller position?
If you are running a small or medium-sized business, you may not have the budget or need for a full-time, in-house controller. But that doesn’t mean you don’t need someone to fill this role and the duties associated with this being a successful hire.
You can still benefit from a Controller’s experience and expertise by outsourcing this role. An outsourced Controller will give you benefits you would not get with an in-house Controller, such as:
No lag in operations: When you hire an outside source for financial work there are multiple benefits. If they are sick, take vacation time, or there is turnover there is always a well-suitable candidate on the team who can pick up the work uninterrupted or step in where needed. This way, your business won’t feel the burden. Furthermore, you won’t have to spend time and money hiring and training another employee. When you outsource your Controller, they are already vetted, so you can be sure the job is completed with efficiency and expertise.
Expertise on demand: When you hire a professional outsourced Controller, they should have an accounting degree, several years of experience working for other companies, and in-depth knowledge within a specific industry. Outsourced Controllers should come with a high standard of financial expertise and knowledge. Bringing on an outsourced Controller who knows your industry inside and out can make you more money and help your company grow. And in the event additional support or expertise is needed, your outsourced firm should have access to an entire team of experts so you are really getting access to the entire company of experts.
Reliable reporting: As a business owner, you need access to accurate financial reports at the end of each month to help you see where your business is doing well, and to highlight problem areas. An outsourced Controller can create monthly reports tailored to your preferences, whether you need general or more in-depth reporting.
Don’t wait until it’s too late to hire a Controller. If your company is growing quickly and you feel that your financials are out of control, now is the time to get expert help before the company starts to suffer. Even if you can’t afford to hire a full-time Controller, you can still reap the benefits of outsourced Controller services. And it might even be a better fit until you really need to hire for a full-time role.
If you’re thinking of hiring an outsourcing Controller or even considering an in-house role, Signature Analytics can provide you with the best advice and direction on how to build your internal team and where outsourcing might benefit your company.
A Signature Analytics financial expert will collaborate with you and your company leadership to oversee the implementation of a financial plan designed to suit your company. They will streamline your current accounting process and provide you with ongoing financial reports and metrics for review. Signature Analytics also offers part-time CFO services, should your business plans require one – which most do at some point.
At Signature Analytics, we work together with our clients to provide them with the benefits of a large firm, coupled with the close relationship of working with a local team daily. Contact us today so we can help you take charge of your business finances and make your company grow.
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Traditionally, a CFO’s role was comprised of reporting, controlling the accounting department, preparing for an audit, supervising capital structure, and overseeing all elements of compliance.
Today not only does the CFO handle all of those responsibilities, but the role has evolved to include duties such as capital allocation and portfolio management, taking the lead in relations with company investors, and being in charge of performance management.
While the role of a finance and accounting leader has many responsibilities, we’ll look at two broad categories: “operational CFO” and “strategic CFO.” Having strategic financial insights is essential, as all business owners already know. First, let’s define these roles, then, let’s address what a business owner can do when a C-Suite hire is not within reach.
What is an Operational Chief Financial Officer?
An operational CFO role is much more than a number cruncher. This person develops a much more holistic understanding of how the company operates, rather than merely focusing on cash flow.
Why? Because an operational CFO typically has a deeper understanding of company processes and systems, which gives them a stronger grasp on what the cash flow figures mean. They also have a firm grasp on operational risk, reporting, and other accounting functions.
These financial management skills make a significant difference in the long-term success of the company.
For example, imagine your company sold suitcases. A traditional CFO could tell you the exact cost to manufacture each suitcase, and how much profit you’d make each time you sell one.
An operational CFO could give you more context into exactly what these figures mean for your business. They might check for inefficiencies in the way the suitcases are manufactured and look for expenses that could be reduced. In the long run, this added layer of analysis would save your suitcase company a lot of money.
What is a Strategic Chief Financial Officer?
Like an operational CFO, the strategic CFO will understand the financial operations of your business inside and out. Beyond this, strategic and operational CFOs have different objectives. Where an operational CFO is concerned with past and present financial analysis, a strategic CFO must be forward-thinking with their strategy, providing valuable insights that can initiate positive changes within the company.
For example, imagine you want to increase revenue for your suitcase company. The strategic CFO will play a major role in how you grow your company. They will work closely with the Chief Executive Officer (CEO) to develop a goal for where the company should be in the next three, five, and even ten years. The executives will work together on a plan to reach these goals, perhaps by launching a new product or redesigning its flagship suitcase.
How Are Operational and Strategic CFOs Different?
Although an operational and a strategic CFO do have some shared responsibilities, there are some differences:
An operational CFO can help you to:
Fully understand the operational functions of the company
Long-term financial planning
Eliminate unnecessary spending
Increase ROI
Identify and improve inefficient operations
Understand the full financial functioning of your company
A strategic CFO can help you to:
Understand your company’s profit trends and how these will impact the future of the business
Determine areas where your business should expand or trim for future growth
Provide information and analysis regarding all strategic decisions
Assess the benefits and disadvantages of alternative models and distribution channels
Analyze areas for further expansion
Develop predictions for the company’s future growth
When Do You Need to Hire an Operational CFO?
The most obvious reason to hire an operational CFO is if you need someone to help you assess your company’s efficiency and make changes to improve production and save money.
An operational CFO will provide you with business intelligence, which can help you mitigate financial risks. They will also help you if you are dealing with a merger or acquisition.
Dealing with liquidation, or equity and debt negotiations are two other scenarios where an operational CFO is the right choice.
When Do You Need to Hire a Strategic CFO?
The most obvious reason to hire a strategic CFO is that they will be able to project your company’s future, provide a strategy for the CEO to run with, and focus on improving profitability.
Your company will also benefit from strategic CFO services because, among their other responsibilities, they will provide stakeholders with assurance that your business finance is in safe hands.
This level of trust means existing stakeholders will want to invest more money into the company, and it will also help to acquire new investors.
What Can You Do If You Are Not Ready for A Full-Time CFO?
It’s clear to see the advantages of hiring an operational or strategic CFO, but if you are running a small to medium-sized business, you may feel an executive is beyond your budget. You may not want to give away equity or, you may simply already know that outsourcing is a great way to scale a business.
At Signature Analytics, our Business Advisory CFO services provide the boots-on-the-ground operational CFO service with the forward-thinking strategic CFO guidance all rolled into one. Working with us as a fractional resource has many benefits, including:
Avoiding the expense of advertising, interviewing, vetting, and training a new staff member
A faster, more efficient hiring timetable
The knowledge that you are working with a fully qualified, experienced finance professional
Always having Business Advisory CFO services available, even in August when most in-house C-Suite professionals are on vacation
High-level CFO insights are essential to growth, scalability, profitability and even succession and exit planning. If your business is ready to take planning and finance to the next level, contact us today to discuss how our expert team can help your company succeed.
https://signatureanalytics.com/wp-content/uploads/Depositphotos_167014604_xl-2015-scaled.jpg13672048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-08-02 10:10:392022-10-21 04:52:39Operational or Strategic CFO: Which Do You Need?
Though the CFO and the financial controller work closely together, they have significantly different roles within a company. The biggest distinctions can best be described by breaking down the operations and responsibilities that come with each role. Another important aspect is the ongoing relationship between a controller and CFO, which is what leads to their success.
1. Scope of Roles: Strategy vs. Tactic
The CFO plays a significant role in strategizing for the company’s future, pushing the organization forward, and advising stakeholders about important business decisions. The controller, on the other hand, tends to carry out tactics that help with the day-to-day financial operations of the accounting department. These tactics enable the CFO to meet the company’s strategic goals.
The strategic planning of a Chief Financial Officer is often illustrated by their ability to identify business risks and make appropriate decisions to mitigate those risks. Meanwhile, the controller implements their tactics to strengthen the company’s accounting procedures.
The CFO’s strategizing is significant because it is their responsibility to help the CEO convince executive management of new ideas. Once those new ideas have been communicated to employees, they begin measuring results against the company’s goals. It is the CFO’s strategic leadership that steers the company in the right financial direction while creating greater company-wide accountability.
The controller, however, looks for ways to improve the company’s profitability and primarily reviews the company expenses. A good financial controller will develop efficient and effective strategies to increase profit margins, increase employee productivity, and find cost savings.
2. Daily Responsibilities: Management vs. Forecasting
Although both roles oversee the financial aspects of the company, the CFO and the financial controller have very different day-to-day responsibilities. Here’s a look at the difference between the two:
What are the Daily Responsibilities of a Controller?
A financial controller has four tiers of accountability, each with its own set of responsibilities. These include:
Management
Implementing and maintaining accounting procedures, processes, and policies
Supervising all accounting department operations
Overseeing control of accounting within subsidiary companies
Transactions
Maintaining an up-to-date data storage system
Ensuring accounts payable and receivable are on time
Ensuring payroll is on time
Supervising bank reconciliations
Keeping an updated chart of accounts
Reporting
Preparing relevant and timely financial reports
Preparing the company’s annual budget and annual report
Suggesting ways to improve company performance
Generating and reporting financial operating metrics
Reporting budget variances to management
Generating financial analysis for management decisions
Compliance
Monitoring debts and compliance
Providing information to external auditors
Providing financial information for tax filing
What are the Daily Responsibilities of a CFO?
A CFO is less directly involved in the financial department’s day-to-day operations compared to the controller. The two tiers of accountability that a CFO has are:
Economic Strategy and Forecasting
Reviewing and comparing the company’s past and present financial situation
Generating forecasts for the company’s financial future
Reporting on where the company is most financially efficient and where improvements can be made
Predicting future scenarios and analyzing the best direction for the company’s success
Treasury Responsibilities
Deciding the best ways for the company to invest money
Overseeing the company’s capital structure
Determining the best options regarding debt and equity
Analyzing issues related to the company’s capital structure
The accounting department may be missing critical opportunities if there is no one in the role of controller. Not only that, but the CFO may be working overtime to get all the information they need to make accurate decisions. Likewise, without a CFO, the larger fiscal picture is at stake and the company may not have an accurate forecast of future finances.
The combined efforts of the CFO and financial controller can help the company realize the CEO’s vision.
If you’re struggling to decide on whether your company needs a financial controller, a CFO, or both, here are some things to consider:
Controller
You may consider hiring a controller if:
Your company is growing rapidly, and you require accounting records based on Generally Accepted Accounting Principles (GAAP)
Your accountant can’t keep up with all the financial data
You need to develop a budget and cash flow forecast
You need financial management reporting
CFO
You may want to consider hiring a CFO if:
You need more than just accounting records
You’re in a transition stage, such as going through a merger, acquisition, or relocation
You need financial forecasts for your company
You need someone to help you make decisions on investments
Outsourcing: For companies who don’t have enough work or enough money for a full-time, in-house CFO or controller, outsourcing is the way to go. Companies like Signature Analytics can provide you with top-notch financial professionals who can help you make the most of your company’s current and future finances. Outsourcing these roles has several advantages:
You get high-quality professionals without having to go through the whole advertising and hiring process
You only pay for the work that’s being done for your company
You save on salary, benefits, bonuses, and raises
You have the ultimate flexibility to scale up or down depending on your needs
You can feel confident that the professionals you outsource are experienced as they are vetted by Signature Analytics.
If you have a small or medium-sized business and think it could benefit from a CFO or controller, please reach out to our team of experts. Even if the company doesn’t have the financial resources to bring these positions in-house, you can outsource these roles. Contact Signature Analytics today to find out how we can help you optimize your company’s financial future.
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An accountability partner is your right-hand supporter who will stand by your side through your company’s ups and downs and who will work with you to achieve your goals.
Often a CFO can act as an accountability partner to a CEO. They can help hold you to your business goals while also keeping you responsible for your actions.
Think of having an executive accountability partner similar to having a gym buddy. They are there to help motivate and encourage you, to remind you to stick to your exercise and nutrition goals, to help you set realistic expectations, and ultimately push you to reach your fitness goals.
What is the Role of an Accountability Partner?
Business accountability partners are similar to a mentor, with a few significant differences. Your mentor is an experienced and trusted advisor who can teach you from their knowledge and experiences.
Your relationship with a mentor is typically hierarchical, but an accountability partner is a peer-to-peer. Having someone who you feel can be candid with you and can keep you on track and ultimately make it easier to achieve your goals.
One modern-day example is Oprah Winfrey stating Maya Angelou (poet and author) was her mentor. Winfrey described Angelou as being “…there for me always, guiding me through some of the most important years of my life.” Winfrey has also spoken of her accountability partners for her personal life, her buddies at Weight Watchers who help her to meet her weight loss goals.
While both relationships benefit Oprah’s personal and professional growth, they fill different roles. When it comes to your business, an accountability partner can prevent you from running your company off the rails and guide you towards success.
What are the Benefits of an Accountability Partner?
We are not meant to do everything on our own, especially when it comes to business. If you can find someone to hold you accountable for your lofty goals, you can achieve those targets much more quickly.
To get the most out of your relationship, consider the following:
How your accountability partner measures and reports your progress
How your accountability partner reacts when you go off-track
How much ownership you assume for your actions
The way in which your company utilizes accountability will determine how you implement your strategy and achieve your goals. Having an accountability partner will affect every goal, task, and action-no matter how big or small.
The benefits that you can reap from your relationship with an accountability partner include:
Your performance will improve: When people know they are being held accountable by others for their actions, they will work harder. Research shows that when someone publicly shares their goals, they have around a 65% chance of success. However, having a specific accountability partner boosts that chance to 95%.
You receive honest feedback: Just as you are committed to your goals, your accountability partner must be committed to giving you honest feedback, both positive and negative. Consider implementing consequences when specific goals are not met. These could be in the form of financial penalties or admitting you let your partner down. On the other hand, brainstorm rewards that your partner can provide when you reach your goals.
You stay on track: Having an accountability partner can keep you on track and improve your productivity. With this structure, it is unlikely you would become distracted from your goals. To avoid any feelings of overwhelm, an accountability partner can help you break down your goals into actionable and attainable steps.
You will be able to create deadlines: Your accountability partner will help you in reaching your goals by setting fixed and public deadlines. Sharing your goals with a partner will help ensure that you reach your deadlines.
You stay grounded: Accountability enables you to reinforce your goals regularly. It prevents you from becoming too optimistic and lets you to keep your feet on the ground, even when day-to-day tasks can seem mundane. Your partner helps you stay mindful of the present so that you can achieve your short-term goals.
You will keep problems in perspective: If you don’t address small problems right away, they can quickly grow into bigger issues. There may be times when you inadvertently overlook concerns that need to be addressed. An accountability partner will provide you with a second pair of eyes, therefore, helping you prevent these instances from occurring.
You can learn from others’ successes and mistakes: Having a conversation with your accountability partner can give you new perspectives on business through real-life examples. You can learn from other people’s successes as well as their mistakes in business. Having this type of partnership can help you identify challenges in your business that you may not have thought about before.
How to Choose Your Accountability Partner
To get the most out of this relationship, you’ll need to choose someone who compliments your personality and knows how to motivate you to reach your goals. Here are some tips on selecting an accountability partner who can help you with your professional growth journey:
Find someone who has incredible self-discipline
Choose an objective partner — not a friend or family member
Choose a partner you want to impress
Define your goals, your plan to achieve them, and how you’ll share and measure progress
Develop a growth plan and timeline with your accountability partner
Do you Have the Wrong Accountability Partner?
After you choose the person who will fill this role, check for any red flags that you may have chosen the wrong partner. A few common signs include:
Compatibility: Do your viewpoints and goals differ widely? Do you frequently clash when you communicate? Is your relationship becoming too much of a distraction?
Mutuality: Do you feel that your relationship is one-sided? Are both of you benefitting from this relationship? Is your accountability partner fulfilling their commitments?
Scheduling: Are you having problems agreeing on a time to meet? Are your schedules clashing? Is your accountability partner not showing up for appointments?
How Signature Analytics Can Help with Your Accountability
Signature Analytics can provide your company with an outsourced CFO to act as your accountability partner through our Financial Performance System. The CFOs function as your strategic partner and will help you develop a financial roadmap specific to your organizational goals in relation to your ultimate vision for your business.
By focusing on your company’s metrics, they will help you to create a realistic, future-focused plan of action, help you in achieving your goals, and make better, informed decisions, leading to several benefits:
You are guaranteed an experienced and fully vetted accountability partner
You can take advantage of a committed accountability partner without paying a full-time salary
Your CFO can help your company grow and maximize your profitability
Your CFO can provide an accountability partner who can work on or off-site to suit your schedule
When it comes to growing your business, don’t try to go it alone. Having a partner to hold you accountable can be the difference between developing a successful financial plan opening the possibility to expand your company, and losing sight of your goals or even losing your business. Contact Signature Analytics to discuss how we can help you stay accountable to your strategic business plan.
https://signatureanalytics.com/wp-content/uploads/helloquence-5fNmWej4tAA-unsplash-e1563835508436.jpg13672048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-07-22 15:46:062022-10-21 04:52:39Accountability Partners and Why You Need One
Are you wondering what does a controller do? The financial aspects of running a company are vital and complex. They include forecasting and planning, accounting and measuring results, and monitoring cash flow. Having this information at hand can help you as a company owner to make better decisions. While managing a business is nothing short of overwhelming, the good news is you don’t have to handle all these processes yourself. You can set up a financial team within your business to help you.
Common Accounting & Finance Positions Within a Business
There are a few key positions within the accounting and finance departments that you should be aware of:
Bookkeeper/Accounting Clerk: Duties include the day-to-day recording and assessment of basic accounting information.
Accountant: Duties include handling money in and money out, payroll, preparing financial reports, and maintaining financial controls.
Financial Controller: Duties include working alongside the CFO and sometimes financial director to provide financial leadership. They are responsible for accounting, reporting, analysis, budgeting, and more.
Chief Financial Officer (CFO): Responsible for overseeing the financial operations of a large business. A CFO leads companies through growth cycles and business downturns. Duties include identifying the best investment opportunities, developing relations in banking, and minimizing finance costs.
The Valuable Role of a Controller
A controller is one of the most influential people within your company’s accounting and finance department. Controllers help everyone within the department work together. Some of their specific duties include:
Ensuring the integrity of all accounting functions
Performing meaningful financial analysis
Facilitation of tax information to your CPA<
Providing financial information to company executives
Provide job training and mentoring ton the accounting department
When Does Your Company Need a Controller?
It takes effective leadership to handle your accounting so that your business can flourish. A financial controller can benefit your company by offering skills and experience that you may not be able to get from other people on your team.
Here are three specific situations where a controller would be a perfect addition to your team:
Your business is expanding: If you are scaling your business and your company is becoming more complex as you add lines of business or open new locations, you run the risk of your operations becoming splintered. When you reach this point, you need someone who can help you generate your financial data and make recommendations to help you use your capital wisely and save money wherever possible. This is where a controller comes in.
You need to supplement your accountant:There is a significant difference between an accountant and a controller. A controller can supervise your accounting team and streamline your financial processes. They can also assist with hiring new members for your accounting department while making sure you have the most qualified professionals.
Your CFO is overwhelmed: If you don’t have a controller, your CFO could possibly handle those duties. However, if your CFO is struggling to handle their role as chief strategist while also supervising the accounting team, you need a controller to step in. A controller can take the load off your CFO by focusing on the day-to-day supervision of the accounting team and providing the CFO with the necessary information to help them make accurate financial forecasts to support future strategic decisions for the business.
Is It Better to Outsource a Controller?
Many small or medium-sized businesses do not have the budget to hire a full-time, in-house financial controller. Nor does it make sense for them to do so. However, this doesn’t mean your business wouldn’t benefit from one. You can take advantage of the numerous benefits of fractional hiring by employing an outsourced controller. These may include:
You may not have enough work to employ a full-time controller: One of the main reasons companies don’t hire a controller is because they do not have enough work to keep them busy full-time. Often, when a business employs a fractional controller, they haven’t had one on their team before. An outsourced solution offers an excellent opportunity to bring a controller onboard while your company is in growth mode.
You may wish to supplement your existing financial team: You might already have an accounting team in place, but if you notice the books are getting out of hand or that things are not as organized as you’d like them to be, an outsourced controller can help. Their role would be to manage the current team. Part of the role includes the streamlining processes and implementing best practices to ensure there is consistent reporting, including an extra layer of review.
You wish to support your outsourced CFO: Not all financial challenges can be met by reorganizing your accounts or creating accurate financial reports. In some cases, you may need the strategic experience and expertise of a CFO. When you combine an outsourced CFO with an outsourced controller, you create a pretty dynamic team. The CFO can analyze your financial data, make financial forecasts, and offer strategic advice on how to change, improve, or grow your business. Meanwhile, the controller can keep the accounting team performing at peak efficiency.
You are preparing for a transaction: You may find having an outsourced controller on your team advantageous if you are planning a transaction such as an acquisition or merger, or if you are attempting to raise capital. As these are typically shorter-term transactions, you may not want to hire a full-time controller, and this might not be a good time to add another full-time employee to your staff.
You want professional confidence: When you outsource a financial controller (or any F&A role), you immediately reduce your hiring process and staffing overhead. You will also simultaneously obtain more immediate professional confidence and experience with this option than you would by going the traditional route of hiring an in-house role.
The credit given here is to the professional service provider’s ability to thoroughly vet the depth of their experience and test their knowledge within this role in a variety of scenarios. Meaning, you can rest assured that you are getting a top-notch professional who has the skillset and experience you need for your team.
You want to save money: Hiring an outsourced controller means you can avoid a full-time salary and save resources on raises, bonuses, and benefits at the same time. As you are only paying for the work you need the outsourced controller to do, you are maximizing your ROI. This model allows for flexibility to scale up and down with the ebbs and flows of your business.
Fractional Controller Services
A professional fractional controller can offer your company a wide range of services such as:
Cash flow management
Drawing up budgets and financial plans
Creating monthly financial reports
Producing industry-specific analysis
Implementing internal financial policies and controls
Supervising preparations for an audit
Training and supervising accounting staff
Expertise with accounting software systems
If you want to take advantage of the experience and expertise of an outsourced financial controller, Signature Analytics can match you with a professional controller who is just right for your company’s needs.
Don’t let a weak or underqualified accounting team let your company down. Contact Signature Analytics today; we’ll help you find a professional controller who can manage your accounting team and take the pressure of your CFO.
https://signatureanalytics.com/wp-content/uploads/Depositphotos_11629373_xl-2015.jpg13652048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-07-18 13:12:362022-11-09 18:03:24What Does a Controller Do and Should You Hire One?
Do you find yourself struggling to manage your business and accounting? Are you concerned about data security? Is it taking significantly longer to handle invoicing and payroll?
You may not have considered outsourcing your accounting, but that might be because you don’t recognize the warning signs that your company needs it.
If you find yourself answering the questions below with an emphatic “yes,” it might be time to start thinking about outsourced accounting services.
Are you spending way too much time on your accounting?
Are you worried about data security?
Are you experiencing delays in accounting and payroll?
Are you having difficulty finding records quickly when you need them?
Is your business growing too fast for you to keep up with your finances?
Are you’re still unsure whether outsourcing services for financial management is feasible for your business? Let’s take a closer look at the key signs indicating that you might be heading in that direction.
1. Your time is being taken up by accounting, and you can’t focus on running your business
Indicators: Whether you are handling accounts by yourself, or you have other team members helping you, if accounting is keeping you from other important business, it’s time to outsource this job. If you have staff members pulling double duties, and your accounting is taking up too much of their time, you need someone to deal specifically with these tasks.
Warning: When you designate this task to other staff members who are not qualified or equipped to deal with accounts, you run the risk of errors in your bookkeeping, which can cause major problems during an audit.
Solution: Outsource your accounting to a professional team who will be able to dedicate their time to the task without making mistakes.
Benefits: Delegating accounting to a professional team means you can give your time to other areas of the business. Another benefit, you won’t have to put pressure on employees to do a job they may not be comfortable handling.
Indicators: This should be a top priority. Have you ever heard that your security is only as strong as the software you use and the servers or networks where you store it? If you’re concerned that your systems are not up to par, then it’s time to consider outsourcing your accounting to professionals.
Warning: Failing to maintain high levels of security can not only hurt your business but can have negative impacts on your clients. By storing your account details on a less-than-secure server, you risk hackers accessing the system and ransoming — or even worse — using or selling your data.
Solution: Outsource your accounting to a company that guarantees secure data storage. Meaning your accounting team should be implementing the most up-to-date encryption technology and software so that you can have peace of mind.
Benefits: Your data is much more secure, and any risk of financial information being compromised is now significantly decreased. An outsourced team of experts can also help to reduce your overhead costs because you will not have to invest in high-tech security and bookkeeping software.
3. You’re experiencing delays in payroll and accounting.
Indicators: It’s vacation time again, and the one member of your staff who knows how to deal with the accounts is taking a week off. Does your accounting suddenly grind to a halt? If you begin to backslide on your accounting and payroll every year at this time, you need outside help.
Warning: Not only a problem for you as a business owner, but it will also create difficulties for your employees who are counting on their paychecks.
Solution: Outsource some or all of your accounting and payroll. You may not need to outsource everything; some remote accounting services will work alongside your staff to help them with finance functions as they need it.
Benefits: Outsourcing your accounting and payroll makes sure invoices and paychecks are always paid on time, keeping you from dealing with angry clients or disgruntled employees. You will always have peace of mind, even when staff members you count on are on vacation or out sick.
4. You’d be worried if you received an IRS audit.
Indicators: All your documents, invoices, receipts, and payroll information is in a filing cabinet, gathering dust. If you were to receive an IRS audit, can you be sure you’d find the necessary documents easily? If not, you must consider outsourcing your accounting.
Warning: If your accounting and payroll information is disorganized, this can cause serious problems. Documents may go missing or information may easily be stolen or changed, which leaves you vulnerable to IRS actions and penalties.
Solution: Outsource your accounting and payroll to a professional remote service. By doing so, this ensures that all your data is stored in an organized fashion, making it easily accessible whenever you need it. Should the IRS audit you and require you to hand over certain information, your outsourced accounting service will be able to provide the exact data you need when you need it.
Benefits: With an accounting team, there will be no more worrying about how to handle an audit. There won’t even be a need to search for files from several years ago while wasting time in the process. When you outsource your accounts, the possibility of an audit will no longer be equal to stress.
5. You’re scaling your business.
Indicators: Every business owner’s dream is for a successful company, with increasing growth and cash flow. When you’re ready to scale your business, this is the perfect time to outsource your accounting.
Warning: Don’t try to take on too many roles when your business is expanding. This is the time you need to focus on doing what you do best—running the company.
Solution: Make the most of outsourced accounting services to free up as much of your time as possible. Allow yourself one less thing to worry about at a time when everything is moving quickly.
Benefits: Outsourcing your accounting and payroll while you’re scaling your business will allow you to focus your energy on company growth and planning, increasing revenue, boosting your brand image, reinforcing your relationships with customers, and achieving company goals.
Why Choose Signature Analytics?
Here at Signature Analytics, we have been providing small and medium-sized businesses with outsourced accounting services since 2008. We have given hundreds of companies high-quality accounting solutions from our team of professionals, including; experienced accountants, controllers, and CFOs.
We enable businesses to receive superior services at a lower cost than hiring in-house accounting employees. We can work to complement your existing staff, or we can handle your entire finance and accounting functions.
Don’t wait until it’s too late to outsource your accounting. Doing so can cost you valuable resources and could ultimately result in the downfall of your company. Contact Signature Analytics today and let us provide you with an accurate, safe, and cost-effective outsourced accounting solution.
https://signatureanalytics.com/wp-content/uploads/Depositphotos_82310164_xl-2015-scaled.jpg13662048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-07-16 10:46:392022-10-21 04:52:405 Signs Your Business is Ready for Outsourced Accounting
As an entrepreneur, you likely have a never-ending to-do list that includes meeting with employees, calling disgruntled customers, reviewing company finances, and more. While the list of to-dos never seems to end, you might have an idea in the back of your mind to someday exit the business you have built.
If you have plans to sell your company or a portion of it, anytime within the next 2 to 3 years, the time to start preparing is now. Do not wait until you receive your first letter of intent from a potential buyer. The more effort and time that you can give to preparing for your eventual exit, the smoother the transition can be when the time comes. You’ll likely feel that more work is piling onto your plate, but this is expected as exiting a business, via acquisition or liquidity event is always time-consuming.
Think of it as more effort now, less stress later. The more you can prepare your business for the possibility of an acquisition, the more value you are adding to the company today. Keeping in mind that the business will be better off when the time comes to transition.
Below are a few steps you can take to prepare your business from a financial perspective.
1. Allow Time to Maximize the Potential Value of the Company
From a financial standpoint, it is advised to begin preparing for a liquidity event at least two years before the potential exit. Doing so will ensure you have ample time to make changes that are necessary to improve the business and maximize the future value of your company.
While it is always important to optimize your company’s profitability and value, it is even more so if you are planning to sell. This can be accomplished by streamlining financial statements to ensure management can review them effectively.
For example, simplified and organized financials will enable you to evaluate profit margins by individual revenue stream, develop Key Performance Indicators (KPIs) and ratios applicable to your company, as well as identify and consistently report on the metrics that drive profitability and value. It is vital to begin this process in advance of any sale or liquidity event, as your management will need time to identify, implement, and benefit from the changes made.
2. Get Your Financial Records in Order
When preparing your company for an acquisition, it is critical that your financial records are well maintained. Keeping pristine financial records helps avoid any pitfalls that may be uncovered through the due diligence process.
If you believe your accounting department may not be technically strong, it is encouraged to hire an outside accounting consultant to help sort through the critical information. An independent consultant or team can ensure you’re fully prepared for the financial due diligence process. They do this by gathering information and creating a strong package of financial information that clearly explains the results of your business operations. Even if you believe your accounting department can handle this process, we recommend having a qualified consultant perform the initial review to provide an outsider’s perspective.
3. Plan Ahead with Sell-Side Due Diligence
While certainly not required, engaging an outsourced accounting firm to perform what is known as a “sell-side” due diligence (or a quality of earnings report) process could save you from significant headaches and distractions during this already stressful time.
Sell-side due diligence allows you the opportunity to go through the due diligence process in a more reasonable timeframe. Proactively doing this allows your management team more time to find, organize, and interpret the financial information. Throughout this process, leaders should identify questions that may be raised by potential buyers, so they are better prepared to respond to items in an organized manner.
The sell-side due diligence team will also identify what are known as “add-backs.” These are described as non-recurring or unrecorded revenues or expenses that are added back to the Earnings before interest, tax, depreciation and amortization (EBITDA) to generate a normalized figure. Add-backs can be subjective in nature; therefore, it’s valuable to identify them before the buyer brings them up so you can prepare how to argue for or against those items in question.
Having a prepared sell-side due diligence report could also limit the amount of investigative work that the buyer determines necessary as they may be willing to rely on some, or all, of the results of the report.
Next Step: Due Diligence
You are ready to sell your business, your financials are in order, and you have just received your first letter of intent from a potential buyer. Next, it’s time to prepare for what many believe is a terrifyingly brutal process – due diligence. Read our blog post on the financial due diligence process to learn what is required and how to prepare your business to ensure a successful acquisition.
Prepare Your Business for an Acquisition or Liquidity Event
If you have plans to sell your company, Signature Analytics can provide ongoing accounting support and forward-looking financial analysis to ensure you get the highest value for your business. Contact us for more information or a free consultation.
https://signatureanalytics.com/wp-content/uploads/preparing-to-sell-your-business-e1562613224436.jpg12292048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-07-08 08:14:052022-11-09 18:21:053 Steps to Prepare Your Business for an Acquisition or Liquidity Event
What is petty cash in accounting? Petty cash, also referred to as a petty cash fund, is a small amount of funds that are kept available for companies to use for small purchases which come up from time to time in the course of business operations. That’s a long way of saying it’s “shoebox money” for expenses which are usually too small to bother using a credit card or writing a check.
Need some postage stamps? Go to the petty cash. Stapler broken? Petty cash. Reimbursing an interview candidate who needed to pay for parking? Petty cash. Pizza for the team working after-hours? Petty cash.
Petty cash funds are small, but they do need to be managed properly. You’ll want to ensure that the money isn’t mishandled, and you’ll want to make sure that those little expenses are accounted for when tax time rolls around. Here’s how you can set up an effective, easy-to-manage petty cash system.
The Advantages of a Petty Cash Fund
Keeping a certain amount of money—say $100—on hand in the form of petty cash is a good idea. A small petty cash fund:
Limits discretionary spending and preventing small purchases from snowballing into a significant annual expense
Allows staff members to make small, authorized purchases without filling out an expense report
Reduces the need for managers to pay for purchases out of pocket
Cuts down bookkeeping
Provides a convenient source of funds
How to Set Up Petty Cash Funds
Typically, one employee is responsible for controlling petty cash funds. This person is known as the petty cash custodian. The custodian will maintain and document all expenses from the petty cash. By giving this responsibility to one custodian, it means that you will retain internal control over the money.
You can set up your petty cash float – the maximum, fixed amount of on-hand cash – by cashing a check, usually ranging from $100 to $500 depending on the size of your business. Larger companies often have a petty cash fund for each department. The amount you select for your petty cash fund must be sufficient to cover small expenses over a designated period, usually one month. You will also need to set up a petty cash account in the asset section of your financial reports.
The custodian is responsible for keeping the petty cash funds in a safe place such as a lockable box only to be accessed when needed. Even though the petty cash account is small, it needs oversight. When the custodian disburses money from the petty cash fund, he or she will write out a petty cash receipt which will be signed by the employee who is receiving the funds. The receipt will also show the amount disbursed and what the fund is being used to purchase.
Establishing Internal Controls for Petty Cash Funds
When you are setting up a petty cash system for your business, you must establish clear and concise conditions so that the funds are not misappropriated. It’s a good idea to specify what things petty cash can be used for; the petty cash policy should be in writing, and available for review by your management team and your employees. Typically, you will want to limit the number of individuals who have access to petty cash funds.
You don’t need to give every employee access to petty cash, and your petty cash custodian should be the only person permitted to disburse it. It should be up to the custodian to decide whether each expense is appropriate based on your company’s petty cash policy.
Make sure that there is a reasonable amount of money in the petty cash fund and that it is enough to meet your company’s needs. Always make sure that the custodian replenishes the fund when it is getting low – making sure, of course, that you know where and how that money has been spent.
How to Manage Petty Cash Funds
Even though the expenses running through your petty cash funds are small, they will still need to be managed properly. Tracking all of your petty cash expenses as part of your bookkeeping system ensures that all tax-deductible expenses are captured.
Managing your petty cash funds begins as soon as the first check has been cashed to create the petty cash float. For example, if you have decided on a petty cash fund for $100, your petty cash account book entry will show a debit of $100 to your petty cash fund and a credit of $100 to your bank account. Every time your custodian disburses money, he or she will fill out a receipt so that at any point in time, the total of the money and receipts in the petty cash box will add up to the initial amount of the petty cash fund.
As the balance remaining in the petty cash fund becomes too small to be of use, the custodian should tally and summarize the receipts and exchange them for a new check made out to cash to equal the total of the receipts. When the check is cashed, the funds will be added to petty cash so that its original level is restored.
If the custodian finds that the petty cash fund is too small—this is the case if the fund needs replenishing every few days—then he or she may increase the float. This would then be recorded in the petty cash accounts. On the other hand, the custodian may find that the fund amount is excessive. In this case, the surplus petty cash should be taken from the fund and deposited in the company bank account.
Petty Cash and Taxes
If this sounds like a lot of work just to maintain a $100 fund, there are good reasons for it. Typically, all or most of your petty cash purchases will be for business expenses, which means they will be deductible from your business taxes. That is why it’s important to keep a record of each expense. If you fail to document them all, you will not be able to deduct them from your business expenses for a purchase. You can find out more information about the requirements for petty cash and recordkeeping by reading IRS Publication 583.
Petty cash is a useful tool for small and medium-sized businesses as it keeps money available for small expenses. Recording those expenses helps to budget for future ones, and even though those might be small, they add up. When all disbursements are recorded diligently by the petty cash custodian and the money is replenished on a regular basis, using petty cash can be a real timesaver.
We Can Help
Of course, overseeing a petty cash fund is still going to add another layer — albeit a small one — to your accounting function. Contact us if you need help establishing a petty cash fund and its conditions.
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Mergers and acquisitions are a common and occasionally disruptive feature of the corporate landscape these days. Some mergers and acquisitions even transcend the business world – think about the reaction of many Marvel fans when they learned that Disney was acquiring Marvel Studios.
Although a merger and acquisition (M&A) involves the transaction of making two companies into one, a merger is different than an acquisition. These terms, often used interchangeably, have clear differences that you should understand before going through the M&A planning process.
An acquisition occurs when one company buys another company and obtains more than 50% ownership. Legally, the original company (target company) no longer exists and is absorbed by the acquiring company. A merger occurs when two companies, usually of equal size, sign a contract to move forward as a single entity. Each company surrenders its stock, which is replaced with new company stock. Mergers can provide benefits for both companies — like cutting costs, increasing profits, and boosting shareholder values.
Vertical Mergers
A vertical merger occurs when two companies that are operating at different stages but share the same industry combine. An example of this would be a pottery store taking over a ceramics factory. This deal increases synergy in the process and will allow the pottery store to gain more control of the ceramics process and grow the business. The purpose of a vertical merger is to secure a consistent supply of goods, increase efficiency, to save on costs, and to increase the profit margin.
Horizontal Mergers
A horizontal merger occurs when one company takes over another company that produces or offers the same products or services and is at the same stage of production. Typically, the two companies are in direct competition with each other. For example, when Hewlett-Packard merged with competing computer hardware producer Compaq – a move that ultimately helped put HP at the top of that particular industry. The purpose of a horizontal merger is to eliminate competition, increase market share, and boost revenue.
Concentric Mergers
A concentric merger, also called a congeneric merger, happens between two companies that are complementary to one another, but not directly competitive. An example might be a company that sells rock climbing helmets that merges with a company that sells rock climbing shoes. The purpose of a concentric merger is to offer a better service to customers, help the company diversify, and increase profits.
Conglomerate Merger
A conglomerate merger involves the combination of two different companies that are operating in different industries, offering various products and services, and are operating at different stages. The recent purchase of Whole Foods by Amazon is a good example. As businesses go, the two could not be more different, but the merger seems to have benefitted both brands, as well as their customers. The purpose of a conglomerate merger is to diversify industries and lower investment risk.
Why You Need to Reprocess Your Financials After an M&A
An essential part of the integration process is reprocessing your company’s financials after an M&A is complete. It can be a useful means of finding new value in the new company. This type of reorganization allows all the business units from the two companies to be united and standardized in a seamless process.
If you are interested in merging your company with another, here are five critical steps to pulling off a successful merger:
Develop a statement of profit and loss: Don’t underestimate the importance of an accurate profit and loss statement. You should have an annual or quarterly snapshot of your revenue, costs, and expenses.
Understand your company’s strengths and weaknesses: It can be a challenge to assess the weaknesses and strengths of your company before the M&A process begins. Ask yourself: What does your company do well? What areas need improvement? Be honest and upfront about the areas where you and your business need to improve and what hope you have for the future.
Research the company that is acquiring you beforehand: Make sure to do your due diligence ahead of time —search the acquiring company’s website or publications and talk with their employees. You want to have a full understanding of the acquiring company as you begin the process. Why? This company is going to have a considerable influence on how your company runs in the future. Are you interested in maintaining your legacy after the M&A? Ask past sellers if their legacy was left intact or overhauled after the sale.
Considering several different options: While it’s smart to consider the outward appearance and impression of the organization, it’s also crucial to think about the underpinnings and how they work. You should be able to put together a solid understanding of what the new company will look like after the M&A, including the new company culture and the individuals within it. Think about the daily processes of running the company and how these will change as well.
Make the structure fit: You might have developed a detailed plan on how you envision the new company should be structured. Try to remember you will likely need to review that plan multiple times and make necessary changes after the deal closes. Doing an ongoing review enables you to confirm which areas are sound and which need to be reconfigured and refined, including outlining new org charts, writing updated job descriptions, and mapping out how things will operate. This may change during the M&A process, but you will have a vision and roadmap of how things fit together prior to the merger.
Be open to the unknown: No matter how much forethought and strategic financial planning you put into the M&A, it is unreasonable to expect the organization to run perfectly after the merger. For almost all M&As, but particularly with vertical mergers and conglomerate mergers, this is entirely normal. However, that doesn’t mean you have to redesign your whole system from scratch when a challenge arises. You do need to encourage your team to indicate and discuss problems when they arise. But you do need to encourage your team to indicate and discuss problems when they arise. After you’ve completed one or two financial cycles, it’s a good idea to conduct a formal assessment. Doing so will illustrate what condition your financials are in and where more changes should be made.
What are the Steps to Streamline Financials in the M&A Process?
Integrating the financials after the M&A is a crucial part of the process. Finances can get tricky when you combine two companies, so you must ensure financial controls are in place. Be proactive and plan out the following steps.
Create a timeline: Develop a timeline to show which activities need to be addressed. Provide deadlines for when they should be accomplished. For example, in the first week following the M&A, establish benchmarks, identify key personnel, and review bank relations. By the end of the first month, meet with management, distribute a code of ethics, and address any employee concerns. Within the first six months, aim for full integration of IT systems, established reporting conventions, and identified high-potential individuals. If you don’t have these things done according to your timeline, don’t panic. Adjust accordingly and make sure you come back to them.
Evaluate finance and accounting personnel: One of the first things an acquiring firm should do is assess the skills and capabilities of the financial team. Doing so will help determine which members can stay, which need to be reassigned to a new department or position, and who needs to be let go. This process is also a good time to address any employee concerns and questions. The remaining staff will be entering a strange new world and will look to you for guidance and assurance. Management should meet with the team as soon as possible and communicate everything about the M&A.
Safeguard business assets: When two companies merge, members in the financial departments should identify and safeguard existing assets and ones that have been acquired. This process also involves assessing any potential areas of concern.
Ensure the adequacy of financial controls: First, management should assess financial controls to ensure that they are compliant with regulations and laws. The regulatory framework and its operations must be thoroughly examined. Draw up a list of all the scheduled authorities, including areas such as hiring and firing, investment decisions, bank mandates, etc.
Review IT systems: It can be a big challenge to integrate two or more different IT systems, and the process can be tricky. In some cases, it may not even be possible, and an entirely new system may have to be implemented. It’s critical to understand and assess the current systems’ strengths and weaknesses. The acquiring company should also identify the existing and future state of the IT architecture.
M&As require close attention to contracts and due diligence. It is equally important to maintain communication and transparency throughout the whole process to build trust with all parties involved, from stockholders to employees. Reprocessing your financials after a merger will help you to integrate business operations effectively and achieve new, streamlined processes throughout the organization.
We Can Help
Contact us if you need help with strategic financial planning after an M&A. Signature Analytics is an outsourced accounting firm providing ongoing accounting support and financial analysis to small and mid-size businesses.
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Clear, concise and regular reporting of financial information to all the internal stakeholders of your business is a vital, yet often overlooked, component of long-term business success. These internal stakeholders can include your management team and board of directors.
Financial Reports: The Roadmap to Reaching Your Destination
When taking a family road trip, one of the first things you do is use a map to layout the journey, locate markers along the way, identify where the destination is and how long it will take to get there. Clear, concise and timely reporting of usable financial information to internal stakeholders operates like a roadmap, but for your business for role clarity.
When putting together this “roadmap” for your business and communicating that information with internal stakeholders, there are a few important things to keep in mind:
It is essential to report information on key operating metrics and not only report on items that can be interpreted from the income statement. For example, the balance sheet and statement of cash flows can also provide important information to internal stakeholders, such as: How much cash is tied up in receivables? Have you taken on new debt? What about inventory?
Ideally, your business should have some sort of stakeholder management dashboard that summarizes all these key internal and external metrics in one place. It should also include metrics and key performance indicators (KPIs) that are unique to your business effort.
Financial information and reports should not be viewed in isolation. Rather, the information should be compared to prior periods to understand influence trends.
The owners of each metric should be able to explain the results that have occurred so internal stakeholders can understand what the results actually mean. Has inventory grown because of a new product line? Has cash increased because the company is now using a line of credit? Is employees utilization lower because the company is hiring in advance of customer growth?
Communicating financial information in an organized and easy to understand method—such as using pictures and graphs instead of a list of numbers, and showing trends to help managers visualize projections—can help increase credibility with board individuals (internally or externally) and improve meeting productivity. Take a look at a recent case study.
The combination of all these will allow the CEO and other internal stakeholders to have greater confidence in their decision-making process and enable them to make those decisions based on dispassionate financial analysis rather than a “gut feeling”.
We Can Help
Presenting timely financial information in an easily digestible format is essential in communicating with internal stakeholders. If you need professional-looking reports prepared to increase your credibility and improve meeting productivity with internal stakeholders, we can help. Contact us today for a free consultation with one of our CFOs.
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It’s not until you start filling in the terms and numbers of your business plan that it shifts from the conceptual to the actual. While your marketing strategy is an interesting read, it’s the figures on the bottom line that will help you get a business loan or investors.
To justify your plan with good numbers, you need a distinct section in your business plan, where you can lay out your financial forecasts and statements. The financial section of your business plan is one of the most critical parts of the whole document if you wish to acquire funding.
The Purpose of the Financial Section of a Business Plan
Before you start organizing your business financials, it’s important to be aware that this is not the same as keeping accounts. There is a significant difference. Accounting takes a historical view of financial information, whereas financial business planning looks to the future. The financial section of a business plan has two primary purposes.
The first is to attract investors. They will want to see your numbers growing and that you have an exit strategy in place for them when they can make a profit. A bank will also want to view these figures, so they know you will be able to pay back your loan. The second purpose of the financials is for your benefit. It gives you a dependable guideline to see how your business is going to do.
What to Include in the Financial Side of a Business Plan
The financial side of a business plan includes various financial statements that show where you want to take your company. This plan helps lenders, and investors see how much financing your business needs and if it is worth their while getting involved.
There are four financial statements that are essential to include in a structured financial plan. These can help you arrange your financial projections for the next three to five years. Your financial plan should consist of the following financial statements:
1. The Sales Forecast
A sales forecast can be laid out in a spreadsheet as a projection of your sales for the next three to five years. Use different sections for each sale type and a separate column for every month for the first year, and monthly or quarterly columns for the next three to five years.
The most definite way to indicate your sales forecast is by providing separate blocks for pricing, unit sales, calculated sales, unit costs, and unit cost of sales. Including all these figures will help you calculate your gross margin, which amounts to sales less the cost of sales. It gives you a useful figure for comparing your forecast with other industry reporting ratios.
2. The Expense Budget
An expense budget helps you figure out how much it will cost you to make the sales you forecast in the previous section. To make it completely clear you are going to need to differentiate between fixed costs (such as utilities, rent, and payroll) and variable costs (such as marketing costs).
Again, don’t forget that this is a business statement, not accounting, so you will have to estimate things like taxes and interest. Keep it as simple as possible when making your operating expenses estimates. For example, to calculate your expected taxes, multiply your estimated profits by your tax percentage. To evaluate and determine interest, multiply your estimated debts by an interest rate.
3. The Income Projection Statement
The income projection statement is the section where you list your projected profits and loss for the next three to five years. You can use the numbers you’ve included in your sales forecast and expenses to help you calculate these figures. You’ll also have to assess your assets and liabilities which are not covered under your income projections. You may wish to create a separate statement for these or include them here. Think about inventory, money owed to you, and assets such as equipment. Under liabilities, you will list any possible outstanding loans and any other bills you may not be able to pay.
4. The Cash-Flow Statement
The cash-flow section of your financial business plan indicates the movement of money in and out of your business. This section is based on a combination of your sales forecast and balance between your projected income and expenses.
If your business plan for the year is to start a new business, you will need to create a cash-flow projection. For an existing business and most clients we serve, you can base your cash-flow statement on balance sheets and profit and loss statements from previous years. Be realistic about the time it takes for your invoices to be paid in full. Being practical in this way can ensure you have no surprised down the road; primarily if you rely on invoices to pay 100 percent of your expenses.
Other Statements for a Financial Business Plan
There are other statements that you can include in the financial section of your business program. While not essential, they can be beneficial for you as you grow your business. These include:
The Personnel Plan
You may decide to create a personnel plan. By creating this plan, you can describe the different members of your management team and what they offer the rest of the workforce regarding management, training, and knowledge of your market. The plan should justify their salary and/or equity share.
This financial condition section can also be used to list each different department in your company, if applicable. You should even name members of staff or departments that you have yet to hire.
The Break-Even Analysis
The break-even analysis is a calculation of how much your company will have to sell to cover your expenses.
For example, consider a landscaping business. It will need to be ready to function with all the vehicles, equipment, business cards, marketing, and all the landscapers working to generate income. If you were to only landscaped one garden, your business would be operating at a loss. You may not even make enough money to pay for gas and materials, let alone wages.
Creating a break-even analysis can give you an idea of how many landscaping jobs you would need to do to cover your expenses.
You may feel overwhelmed at the prospect of creating a financial plan, and it can undoubtedly be challenging. But it is essential that you fully understand each section. As a business owner, you may consider hiring a bookkeeper to handle your account once your business is running. You will need to understand your business’ financial statements and use them as a basis for making decisions about your company. Numerous available software programs can help you put it together and lighten your load.
In the long run, the financial statements in your business plan will outline the growth and potential of your business. And once you can show where your financial performance figures are coming from, you will significantly increase your chances of getting funding from lenders or investors. So, don’t skimp on your financial statements, take the time to learn how to do them properly, and get them right. It will be worth it in the long run.
We Can Help
If you need help determining which financial statements you need or require consultation when setting up a business plan, we can help. As an outsourced accounting firm, we provide ongoing accounting support and financial analysis to small and mid-size businesses. Our team of highly experienced accountants will act as your entire accounting department (CFO to staff accountant).
We complement and work alongside your internal staff to provide ongoing accounting and finance support for your business. These areas are necessary to effectively run your company, analyze operations, and guide business decisions. Contact us today so we can get started.
https://signatureanalytics.com/wp-content/uploads/broadcast-media-case-study-aspot.jpg600750Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-01-22 12:30:232022-10-21 04:52:42What Are The 4 Financial Statements You Need to Grow Your Business?
We have heard it again and again. This phrase seems to be the creed of the business world. There is something about assigning a number and correlating that with meaning to prove we are being successful.
Just like in sports, success is measured by the score. In business, success is measured managed by numbers. In many cases, these measurements are tracked and monitored to help management gauge the performance of the company, and these kinds of metrics are referred to as Key Performance Indicators (KPIs).
In business, many of a CFO’s responsibilities are to develop KPIs applicable to the company, regularly support the analysis of those KPIs, and driving changes that directly improve KPIs. All of these actions are done to hopefully improve the future value of the company.
The Importance Of KPIs To Business Success
Businesses are multi-faceted and so a company needs to monitor several different KPIs to provide insight into how the business is performing. Some of these measurements may be more basic, like inventory turnover. While other KPIs can be more involved, such as employee utilization or profitability by an individual client or product line.
Once KPI goals are defined, it is important to understand how those measurements can be used to enhance the performance of the business. For example, JPMorgan Chase & Co was able to reduce their fully burdened labor costs by $3.2 million annually by eliminating voice mail for consumer-bank employees.
Another great example is with one of our very own brewery clients. We were able to increase profits by 15% after adjusting their pricing and distribution strategies following a detailed analysis of their profit margins by individual product line.
It’s important to understand that knowing what to measure matters and then making operational changes to influence those measurements directly can have a significant impact on the bottom line. If you measure many things that don’t matter, you’ll end up with a ton of meaningless data.
What Are The Examples Of Key Performance Indicators?
KPIs will be different for every business. Below are some basic examples, how they can be calculated, what they measure, and the best way to use the measurement to improve profitability.
Days Sales Outstanding
(Accounts Receivable) / (Sales on Credit or Terms) x (Number of Days the Sales Represent)
This KPI measures how many days of sales are in accounts receivable. Hopefully, this measurement will be at (or near) what your credit terms are. For example, if you have credit terms of 45 days, your day’s sales outstanding should be close to that number. This KPI can be impacted by offering a slight discount for early payment to reduce outstanding accounts receivable.
(Cost of Goods Sold) / (Average Inventory) x (12 Months)
This KPI measures the number of times the inventory is sold–or the amount of turnover–in one year. An inventory turn of 1 would mean you sell all your inventory once a year, whereas an inventory turn of 12 would indicate you sell your inventory every month. This KPI is influenced by reducing slow-moving or excess inventory, or by increasing sales, which will, in turn, improve cash flow.
Days Sales in Inventory
(Average Inventory) / (Cost of Goods Sold) x (Number of Days)
This KPI measures how many days of inventory is on hand. It is similar to inventory turnover but indicates the number of days until inventory is sold. For example, if the day’s sales in inventory are 30 days, then the inventory turns would be 12 (or once a month). You can affect this KPI by carrying the least amount of inventory necessary to meet demand.
Working Capital
(Current Assets) – (Current Liabilities)
This KPI measures the available assets to meet short-term financial obligations. These types of assets can include cash, investments, or accounts receivable. A company can analyze financial health by seeing which available assets can meet short-term financial debts. To calculate working capital, subtract current liabilities from current assets such as the examples mentioned earlier.
Return on Assets
(Net Income) / (Total Assets)
This financial KPI measures the rate of earnings generated from invested capital in assets and can be affected by increasing earnings and/or reducing invested capital.
Return on Equity
(Net Income) / (Shareholder’s Equity)
This financial KPI measures the return on capital invested by shareholders of the company and can be affected by increasing earnings and/or reducing the amount invested by shareholders.
What KPIs Are Important To Measure?
KPIs for capital-intensive industries (manufacturing, distribution, telecommunications, transportation, etc.) often focus on how effective and efficient assets are utilized to produce a return. Whereas KPIs for service-based organizations (i.e., companies that bill people, hours, or projects to clients) tend to focus on utilization (percentage of total working time charged to customers) to drive profitability.
Most businesses, regardless of the industry, should measure KPIs that focus on generating positive cash flow from operations. Companies should also monitor how quickly it can turn sales into cash (days sales outstanding) or how long the money is invested in inventory (days sales in inventory).
The important thing is to determine what measurements are most appropriate for your specific business and industry. One way to do that is to look at other companies in the same industry and identify what measurements they are using. Those analyses can also be used as benchmarks to compare your business against others in the same industry.
Profitability is the easiest and most straightforward measurement of a company’s success. However, if you want to take your business to the next level, it is also important to look at other key performance indicators that can drive profitability and how they can be influenced to increase and drive performance. If you need help identifying, monitoring, and influencing KPIs to improve the current and future value of your business, contact us today for a free consultation.
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Internal controls are a series of policies and procedures that a business owner puts in place for the following purposes:
Protecting assets: internal controls protect assets from accidental loss or loss from fraud.
Maintaining reliability: internal controls make sure that management has accurate, timely, and complete information.
Ensuring compliance: internal controls keep accounts in compliance with the many federal, state, and local laws and regulations affecting the operations of a company.
Promoting efficient operations: internal controls create an environment where managers and staff can maximize efficiency and effectiveness.
Accomplishing objectives: internal controls provide a mechanism for management to monitor the achievement of operational goals and objectives.
The responsibility for maintaining internal controls falls on administrative management. Members of the management team are responsible for communicating to staff their duties and expectations within an internal control environment. They are also accountable for ensuring that other areas of the internal control framework are dealt with consistently.
There are three main types of internal controls, these are:
Detective Internal Controls
This type of control is designed to highlight any problems within a company’s accounting process. Detective internal controls are commonly used for things such as fraud prevention, quality control, and legal compliance. Examples of detective controls include an inventory count, internal audits, and surprise cash counts. Detective internal controls protect a company’s assets by finding errors when they occur so that business owners can minimize their impact on the company.
Preventive Internal Controls
This type of control is a proactive control designed to prevent errors and irregularities from occurring. Preventive internal controls are usually performed on a regular basis. Some examples of preventive controls are:
Separation of duties: splitting tasks for bookkeeping, deposits, reporting, and auditing, so there’s less chance of employee fraud.
Controlling access: this feature prevents team members from logging into certain parts of the accounting system unless they have a password.
Double-entry accounting: a system that adds extra reliability so that books are always balanced.
>Preventive internal controls are put in place to help with clerical accuracy, backing up data, and preventing employee fraud. These internal controls help to avoid any problems or irregularities so that the business processes can run smoothly.
Corrective Internal Controls
Corrective internal controls are put in place to correct any errors that were found by the detective, internal controls. This type of internal control usually begins by detecting undesirable outcomes and keeping the spotlight on the problem until management can solve it. If an error occurs, then it is essential that an employee follow procedures that have been put into place to correct the mistake. Examples of corrective internal accounting controls include physical audits (such as hand counting money) and physically tracking assets to reveal well-hidden discrepancies. Implementing a quality improvement team can be a great way to address ongoing problems and to correct processes.
Other Forms of Internal Controls
There are other forms of internal accounting controls, these include:
Standardized Documentation
When accounting documents such as inventory receipts, invoices, internal materials requests, and travel expense reports are standardized, this can help to maintain consistency in the company’s records. Standardized document formats also make it easier to review past records when a discrepancy has been found in the system.
Trial Balances
This internal control entails using a double-entry accounting system. Doing so increases reliability and keeps the book balanced. Errors may still throw a double-entry system off balance. If employees calculate daily or weekly trial balances, this will help maintain analysis of the state of the system so that discrepancies can be discovered early.
Periodic Reconciliations
Occasional accounting reconciliations mean that account balances in the company system can be matched up with balances in independent accounts such as credit customers, suppliers, and banks. Any differences between these accounts will highlight errors.
Approval Authority
This internal control requires members of the management team to authorize specific transactions. Approval authority adds a further layer of responsibility to accounting procedures because it proves that any transactions have been analyzed and approved by the appropriate managers.
Ways to Improve Internal Accounting Controls
There are things you can do to strengthen your internal accounting controls. Here are a few suggestions:
Allocate Separate Accounting Responsibilities
Instead of relying on one employee or bookkeeper to handle all the accounting duties, segregate the processes to different members of your team. For example, processing receipts and payments can be separated. Other activities that can be separated include signing checks, approving invoices, and reconciling accounts. Allowing a single person to handle all these accounting processes increases the risk of errors or fraud.
Increase Oversight
Even though you have internal controls, they will not be effective enough without oversight. If you don’t have time to do it yourself, you should allocate a trusted member of your personnel to review statements, account reconciliations, and payment registers periodically. Look out for unapproved expenses or raises, non-existent employees, and unapproved hours. Make it a priority to review your company’s financial data so that you can stay abreast of trends and changes in your financial reports.
Restrict Employee Access to Financial Systems
Typically, business accounting software allows users to edit previous transactions. This unmonitored permission opens up the potential for employees to hide fraud or theft. As a business owner, you should restrict employee access to the company’s financial system to reduce the risk of employees changing and deleting entries. You can also review any transaction changes in the system to reveal any irregular activity.
Have a Third-Party Overlook Financial Statements
You can increase the safety of your assets by having a third party review your company’s accounts. Any employees who are involved with internal accounting and aware of your third-party review will be deterred from fraudulent practices. An independent reviewer will also be able to identify errors and inconsistencies.
Perform a Self-evaluation of Your Internal Controls
Performing a self-evaluation can help you to highlight any areas that come up short before problems arise and give you the opportunity to use more effective controls. The easiest process to perform a self-evaluation is by conducting a trace of a particular transaction throughout company records and procedures. The trace will give you a deeper understanding of your internal controls in action, particularly those controls which are in place to detect or prevent fraud. You will also be able to see if your internal controls have been designed effectively and are operating as intended.
Effective internal controls for your accounting and finance should be an integral part of your business plan. Internal controls significantly reduce the risk of loss of assets and increase the reliability and accuracy of all your accounting and finance operations. Additionally, controls ensure that your company’s accounting system is in accordance with applicable laws and regulations.
We Can Help
You can contact us if you need help establishing internal controls for your accounting and finance department to protect your business assets adequately. Signature Analytics is an outsourced accounting firm providing ongoing accounting support and financial analysis to small and mid-size businesses. Our team of highly experienced accountants will act as your entire accounting department (CFO to staff accountant), or complement your internal staff, to provide the ongoing accounting and finance support necessary to effectively run your company, analyze operations, and guide business decisions.
https://signatureanalytics.com/wp-content/uploads/accounting-blur-business-1028726.jpg13652048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-01-17 09:33:332022-10-21 04:52:42The Three Main Internal Controls for Accounting and How They Protect Your Assets
Have you ever wondered how to create a business budget? An annual budget is an essential financial plan for a company’s expenditure for the coming fiscal year. Company owners can use this plan not only to calculate their yearly budget, but also to determine when to file tax forms, get audited, and close the books. Creating a business budget involves balancing your company’s revenue with its expenses using past trends and realistic revenue expectations so that you can predict your needs for the next fiscal year.
Why Does a Business Need an Annual Budget?
A company needs to know how to make a business budget for many reasons. Most importantly, it acts as a roadmap to where your business is going in the next year. Once you establish how much money you have, you can determine how much money you can spend and how much cash you need to meet the goals of your business. Curious how to prepare a budget for a company? This process is vital for several reasons:
It sharpens your understanding of company goals
It allows you to portray the real picture of what is happening in your company
It provides effective ways of dealing with money issues
It fills the need for required information
It facilitates discussion of the finances
It enables you to avoid surprises and gives you full control
This is How to Prepare a Business Budget
Before you begin your forecast for revenue and expenditure, you will need to gather income and expense data from previous fiscal periods. Collecting this information will help you estimate the future budgeting process based on past trends. For example, if you are creating a quarterly budget, then look back at your previous two or three quarterly financial statements. This way, you can create a custom budget based on your desired timeframe. Once you have the trend data, you can use it to create a baseline projection for future revenue and expenditure. For example, if your revenue has increased at an average of 25 percent each quarter, for the past six quarters, increase your baseline projection for the next quarter by 25 percent.
What Are the Elements of an Annual Budget?
For your budget to be adequate, you should break down income and anticipated expenses either by month or by quarter. Which one you choose will depend on the size of your company. The budget should incorporate separate accounts for each of your business’ departments. These departmental mini-budgets should also be broken down by month or quarter. There are many factors that you need to consider when putting together your company’s yearly budget. These components are essential if you want to create an accurate and up-to-date annual budget and maintain control over finances. The budget needs to include:
Projected expenses: the amount of money which you expect to spend during the fiscal year. Projected expenses can be broken down into categories such as salaries, office expenses, etc. There are several steps to make a correct estimate of your projected expenses. The first step is to make a list of your company’s necessities for the fiscal year. You can look back at trends from past years to help you stay accurate. Next, make a list of expenses you will require to conduct typical business activities. It would help if you also listed any of your company’s fiscal obligations. Finally, list the items you would like to purchase for your company but may not be able to afford during the upcoming year. Add up all these expenses to provide a guideline for your budget.
Projected income: the amount of money you expect your company to make during the coming fiscal year. Projected income includes revenue and any income which may be coming from grants, contracts, funding sources, memberships, and sales. There are several steps you will need to take to reach your projected income. The first step is to estimate the amount you expect to accrue from sales revenue. Next, determine the amount you expect from fees that you charge for services. Finally, estimate the figures you expect from fundraising, investments, and memberships. Adding up these figures will give you your projected income for the year.
Interaction of expenses and income: This aspect of the annual budget entails keeping track of the money that was given for a specific activity, item, or position by a funder. It is important to build in any restrictions that might come with the money so that nothing comes as a surprise later.
Adjustments to reflect reality: You must remember to factor in funds for emergencies and unexpected necessary purchases. Also, don’t forget that your annual budget will begin as an estimate, so you will need to adjust it throughout the year to make it more accurate. To do so, layout your figures in a useful format so you can easily compare the total expenses with the total income. Stick to your expenditure budget as much as possible because a budget surplus may not show up until the end of the fiscal year.
This is What Should Non-profit Organizations Should Know
Typically, non-profit organizations are required to undergo an annual audit. The audit must be conducted by a Certified Public Accountant (CPA) that will examine your organization’s financial records to ensure that they are accurate. The CPA will also work with you to solve any problems or correct any mistakes. Providing that the records are in good order, and there is nothing illegal found, the CPA will prepare a financial statement for the organization based on the documents examined. The statement certifies that the non-profit’s accounts are in order and that professional accounting practices (or as we recommend, GAAP) have been followed.
This is How You Trim Your Company Budget
In certain circumstances, you may wish to cut your company’s budget. If so, it’s crucial that you do it in an organized way. Here are some considerations to help you decide on what you can and can’t cut:
Make sure you don’t cut services or items that are necessary for running your business.
Are you able to reduce the number of physical items you need to run a department?
Do you need to consider making staff cutbacks? If this is the case, could you reduce staff hours, ask members of staff to increase their share of their fringe benefits, or is it necessary to lay off some members of the staff?
Do Not Disregard an Annual Budget
Annual budgets are essential for evaluating your company’s performance over the course of a fiscal year. Because you will be comparing and raking revenues and expenditure and comparing these aspects to what was budgeted, you can make sure that your company is sticking to its original plans. Budgeting also presents an excellent opportunity for you to identify issues and opportunities. For example, if sales in the first quarter turn out to be lower than projected, you will be able to see where you can cut expenses late in the financial year to remain profitable. Equally, if you introduce a new product that turns out to be more valuable than you anticipated, you will be able to see exactly where you have additional revenue, and you can revise your budget and perhaps use the extra money to increase production.
Looking for some small business budget templates to help get started? Check out the link or contact us. It’s clear to see why annual budgeting is important for your business. You can make sure that you are utilizing your entire annual budget optimally by employing the best budget management practices. This is the only way your company will truly grow and continue to be successful.
https://signatureanalytics.com/wp-content/uploads/Depositphotos_1935954_xl-2015.jpg13522048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-01-15 09:28:382022-10-21 04:52:43How to Create the Perfect Annual Budget for a Business
Running a business is hard work, and business leaders continuously face new trials, even when their business is extremely successful. For business leaders to continue with growth and success, they must be prepared to overcome challenges. Given that financial leaders control millions of dollars, they have a unique vantage point into how to run a business and maintain its viability.
4 Financial Leadership Lessons for Business Owners
Are you just starting as a new business owner? Have you been running a corporation for years? Either way, you can’t go wrong with these four financial leadership lessons.
1. Make sure you know and understand your numbers
As a business owner, you absolutely must understand which numbers drive your business. It’s crucial to stay informed about these metrics as they change from day to day and month to month. This data ranges from cash balance in the bank to complicated calculations and forecasts. You can keep ahead of the financial game by maintaining a weekly and monthly data chart to track metrics.
Don’t worry if you lack the financial background to determine which metrics you need to follow or how to track them. Get someone from your team to do this for you. If you don’t have anyone on your team who can do this, then it’s time to recruit a new member for the decisions.
Kroger Chief Financial Officer, J. Michael Schlotman has been with the company for more than 30 years and has been CFO since 2000.
Before joining the Kroger team, Schlotman worked with the accounting group Coopers & Lybrand. Since joining the board at Kroger, Schlotman was recognized for multiple achievements within the company, including doubling Kroger’s digital investments and acquiring stakes in overseas companies.
His advice to business leaders? Be as comfortable with the people as you are with the numbers behind the business.
2. Transparency is crucial for growth
Once you are fully up-to-date with your company’s figures, you must share that data with your internal stakeholders. So, in addition to providing items related to your income statement, give them information related to your inventory, how much money you have tied up in receivables, and your current debt load.
These figures should not be viewed in isolation but should be shown in contrast to prior periods to highlight trends. Sharing metrics that help drive company growth and profit will encourage your stakeholder’s ability to invest in improving company performance.
When your company is financially successful, you can invest more money in its employees through expanded benefits, office amenities, bonuses, and personal development opportunities.
Ned Segal joined Twitter as their CFO in 2017. Before joining the team, Segal was a Goldman Sachs banker for many years and more recently held the position of Senior Vice President of Finance at Silicon Valley’s Intuit. His advice for financial leaders is to find the truth in the figures.
Elizabeth Elliott, VP of Equity Research, has been with the company for a year. Her role is to perform financial modeling to share with company leaders and shareholders. Her advice to business leaders is that to maintain financial success in business, you must be honest and prepared to admit your mistakes.
3. Understand your customer’s values and invest there
Too often, business leaders become distracted in attempting to please too many different people by offering too broad a range of services and features. Consequently, they end up spreading themselves too thinly and losing money. It’s essential to reduce your costs by avoiding the selling of goods and services that are not essential to your customer base.
The key factor here to remember is your goals are to improve your product and your customer service to increase sales growth. Don’t attempt to incorporate too many different aspects into your service. Otherwise, you will tend to lose sight of the things your customers truly value. To do this effectively, you must understand what generates profit and invest in those areas.
CFO of Home Depot Carol B. Tomé has been in her position since 2001. She was named the executive vice president of corporate services in 2007. As well as financial leadership, her areas of leadership expertise include real estate and strategic business development. Tomé’s advice to be great leaders is to understand that you need to become a master of connecting with your audience.
4. Motivate employees to boost your business
Having a growing business gives employees opportunities to make an impact and leave their mark on it. Employees want to have a role, clear and achievable goals, and purpose. Therefore, the ethos behind your company and its strategic goals and objectives should be made clear.
The key to success in this instance is maintaining clear and consistent communication. Excellent communication helps keep employees engaged, productive, and loyal to your company’s vision. Remember to talk with rather than to your team.
Another critical element to motivating your employees is maintaining an air of professionalism. Professionalism and proper interpersonal behavior nurture pride, as well as team loyalty. While you are demonstrating your level of professionalism, encourage employees to achieve their own level of skills.
The CEO of Morgan Stanley, Clare Woodman, joined the team in 2002 as a lawyer in Global Capital Markets. She advises business leaders to remember that preparation is more powerful than perfection and that striving to be prepared means more success in the workplace.
What should you do now that you have gained a bit of business wisdom from some of the top industry experts? Put their practical knowledge to work in your business. Bear in mind that although it’s relatively easy to start up a business of your own, only a few company owners achieve success in the long term. Always strive to keep learning from other business leaders; this will help you grow and keep you in the right frame of mind to make your business succeed.
https://signatureanalytics.com/wp-content/uploads/tips-from-successful-leaders-scaled.jpg13672048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2019-01-08 14:30:172022-10-21 04:52:43Financial Tips from Successful Leaders
There are several financial reports that will provide insight into the past, present, and future financial state of the business. As a business owner, it is critical to have an annual report of this financial data as it will allow you to more effectively run your company, enable you to better analyze operations, and help guide business decisions.
Of all the financial reports, below are five of the most essential accounting reports every business owner should be reviewing on a regular and annual basis to gain a better understanding of the company’s financial performance.
1. Balance Sheet
The Balance Sheet is a financial statement summarizing a company’s total assets (current, non-current and intangible assets), liabilities (financial obligations), and shareholders’ equity (investments and retained earnings) at a specific point in time, usually at the end of an accounting period. It provides a snapshot of a company’s financial position, including the economic resources the company owns, owes, and the sources of financing for those resources.
The Balance Sheet can be used to identify trends and make more informed financial accounting decisions. It is also important to lenders, as they will use it to determine a company’s creditworthiness.
2. Income Statement
The Income Statement is sometimes referred to as the Profit and Loss Statement (P&L), Statement of Operations, or Statement of Income. The Income Statement summarizes the total revenues and expenses incurred by the business, showing the profitability (net income or net loss) over a specified period of time, usually a month, quarter or year.
The Income Statement is used by internal stakeholders (such as the management team and board of directors) as well as external stakeholders (such as investors and creditors) to evaluate profitability and help assess the level of risk for an investor or creditor. In order to have a viable and valuable company, revenues must exceed expenses.
3. Cash Flow Statement
The Cash Flow Statement summarizes all cash inflows and cash outflows of a business over a period of time. This statement is different from the Balance Sheet and Income Statement because it only takes into account cash money activity; it does not account for non-cash activity such as sales or purchases on credit or depreciation.
The Cash Flow Statement is presented with three sections: operating, financing and investing activities, and indicates which areas of the business are generating and using the most cash. One of the best uses for the Cash Flow Statement is to estimate future cash flow which will assist with budgeting and decision making.
The Cash Flow Statement, Balance Sheet and Income Statement together make up the standard financial statement package. These financial statements should be prepared by your accounting team on a monthly basis after the month-end close procedures have been performed. They can (and should) be used to calculate key performance indicators and monitor them over time.
4. Accounts Receivable Aging Report
The Accounts Receivable (A/R) Aging Report categorizes outstanding accounts receivable into groups based on the due date of the invoice, typically current, as well as 1-30, 31-60, 61-90 and >90 days overdue.
A common source of cash flow problems (especially for small and mid-size businesses) is poorly managed accounts receivable. The more cash you have tied up in receivables due to slow-paying customers and delinquent accounts, the less cash you have available for running your business. Reviewing the A/R Aging report will help companies proactively manage the receivable collections process immediately upon invoicing and create more accountability for the person responsible for collections.
The A/R Aging Report can be generated out of most accounting systems and can be reviewed at any time. If collecting on accounts receivable is an issue for your business, a weekly review of this report may be necessary to assist in identifying past due accounts. Once these accounts are identified, collection procedures can be initiated to improve business cash flows.
5. Budget vs Actual
As the name suggests, this report is a comparison of actual results, primarily from the Income Statement, against the budgeted amounts that were projected at the beginning of the period. This report will allow the reader to assess how closely a company’s spending and revenue generation meets the financial forecasting projections included in the budget. It can help identify areas that were over and under budget, indicating the ability to hire additional employees or bringing attention to a gross profit margin not in line with financial reporting expectations, for example.
The Budget vs. Actual Report should be prepared on a monthly basis and reviewed with the financial statements to determine if any areas of the business are not meeting expectations and should be investigated further.
We Can Help
Our highly experienced accountants can complement your internal accounting employees, or act as your entire accounting department (CFO to staff accountant) on an ongoing basis. We will consistently provide you with timely and accurate financials and reports (like the ones mentioned above) on a monthly basis, as well as the actionable financial analysis you need to effectively run your company, analyze operations, and guide business decisions. If your business needs additional accounting support, contact us today to schedule a free consultation.
https://signatureanalytics.com/wp-content/uploads/top-5-reports-every-business-owner-should-know-scaled.jpg13652048Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2018-12-18 09:00:362022-11-09 18:04:41The Top 5 Financial Reports Every Business Owner Should Review
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.
https://signatureanalytics.com/wp-content/uploads/cash-vs-accrual.jpg282425Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2018-12-17 09:50:182022-11-01 21:09:19Cash Basis or Accrual Basis – Which Accounting Method is Right for Your Business?
Earlier this year, a company approached us after identifying some unusual checking activity while their bookkeeper was out of town for a week at training. They asked us to come in to look at all of the activity and determine if their accounting records were accurate. One of our accounting managers went to their office the following day to review the books (while the bookkeeper was still away at training) and identified that the bookkeeper had been colluding with a vendor to issue fraudulent payments and splitting the proceeds.
Needless to say, the company fired the bookkeeper for theft. The company requested that our accountants take over the role until they could find a replacement and we have continued to provide ongoing internal control accounting support to the company, including oversight for the new bookkeeper.
As a business owner, often your main focus is on the operations of the business. We have worked with several business owners who did not make financial information a priority, instead of focusing only on revenue. We work with other business owners who also recognize the importance financial statements play in understanding the state of the operations of their assets; however, with the best of intentions, they delegated the accounting work to an available employee (such as an office manager or admin), or to a bookkeeper with little to no accounting background, while providing no oversight at all.
Here are 5 ways to improve internal controls and oversight within your organization to help protect your business from employee fraud:
1. Segregate Accounting Duties
Small businesses usually depend on one employee or a bookkeeper to ensure the process in all aspects of the accounting process, including authorization, execution, custody, and posting of transactions. Ideally, the processing of cash receipts and payments will be separated, with segregation of duties with different people approving invoices, preparing checks, signing checks, and reconciling the bank accounts. Allowing one individual to handle cash or checks received, the deposits, and the posting of payments in the system increases the risk of fraud. These processes should be segregated among different individuals. If this is not feasible for your organization, it is advisable to rotate individuals performing the above tasks periodically.
Additionally, you could use an AP risk and control matrix to help your company assess and minimize inherent risks resulting from faulty accounting data and residual risks, which can remain even with good controls. AP automation providers, like Sampli, can help companies prepare AP risk and control matrices by keeping detailed and easily accessible accounting data, which gives business owners and CEOs a complete picture of what they’re up against.
You could also consider the use of an online payment service that can be accessed anywhere and provide you with increased account control over the payment process. Bills and payments can be authorized conveniently prior to any cash disbursement. If your situation still warrants physical check policies, consider signing them yourself or authorizing an additional signer. Ensure objectives that the signer is separate from the person issuing the checks and that the signer matches the checks to invoices prior to mailing. Finally, be sure to store blank checks in a safe place restricting access to avoid risk.
2. Restrict Access to Financial Systems
The most common accounting software used by businesses gives its users the ability to edit and delete previous transactions which could lead to easy concealment of theft. Business owners should retain ADMIN rights (if possible) to the company’s accounting system and consider restricting user access to only areas necessary for their functions. This will help reduce the chances of an individual creating false entries and covering up their tracks. A review of voided and deleted transactions will show any adjustments or deletions and can be instrumental in exposing irregularities in procedures.
If approval rights are granted to an employee or bookkeeper in your online payment service, a review of credit memos should be performed to ensure the validity of issued credits and deter the creation of false credit memos to cover any intercepted cash.
3. Increase Oversight
Internal controls without oversight are not good enough. You, or a trusted resource, should diligently review bank statements, check or payment registers, and bank reconciliations regularly. Review payroll statements for phantom employees and unapproved raises, hours, or even expenses. Impress upon the employee the need to keep supporting documents and you should periodically review some transactions and supporting documents for validity and accuracy.
Most importantly, business owners need to follow policies and procedures to make it a priority to review financial reports and understand the trend and changes in the business’s financial data. There should be a focus on understanding month over month or quarterly fluctuations as well as variances between budget and actuals.
4. Have Financial Statements Reviewed by a Third Party
To support bookkeepers and other in-house accounting efforts, business owners should consider utilizing their CPA to periodically review the financial statements. An individual who knows that the work performed will subsequently be reviewed is more likely to be deterred from committing fraud. An outside accountant can be instrumental in identifying inaccuracies and inconsistencies in the financial records as well as helping business owners better understand the procedures of their financial data.
5. Require Employees to Take Vacation
In the client example mentioned earlier, the company identified the unusual checking activity while their bookkeeper was out of town for training. Embezzlement and other types of fraud require a constant paper trail cover-up in order to go undetected in accounting records. Therefore, business owners should insist that employees who perform the company’s accounting/bookkeeping duties take a vacation every year and designate a backup person to cover their responsibilities during that leave. Ideally, the vacation should be at least a week-long and occur over a month-end when the books are being closed.
Signature Analytics provides small and mid-sized businesses with the resources of a full accounting team on an outsourced basis, so our clients achieve effective segregation of accounting duties without having to hire additional full-time accounting staff. We ensure that all of our clients have preventative controls in place and provide an appropriate level of oversight and challenge for the company’s financial books and records.
To learn more about how Signature Analytics can help ensure your business is protected from employee fraud, contact us for a free consultation.
https://signatureanalytics.com/wp-content/uploads/bookkeeper-oversight.jpg4601018Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2018-12-11 09:42:572022-10-21 04:52:455 Ways to Improve Internal Accounting Controls and Oversight in Your Business
Most companies are looking to grow and expand. But the process of taking out a business loan isn’t an easy journey down a well-paved road.
More than one-third of all small businesses who apply for a loan are rejected. And most don’t understand why. Here are five reasons why your business might be rejected for a loan and what your company can do to increase your approval chances.
1. Not Supplying the Correct Documentation
Let’s face it; paperwork can be overwhelming and confusing. However, it shouldn’t be the reason a business gets denied a loan. Sadly, it is one of the most common causes of rejection.
Not submitting the correct documentation for a credit renewal will increase a company’s chance of getting rejected. Here are the types of documentation you should expect to present:
Annual financial statements
Tax returns and previous year data
Personal financial statement from the guarantor (who is typically the owner)
Financial projections for the next 1-2 years, especially when an increase is needed
Loan contracts per the loan agreement. This shows the financial health of the business and eliminates loan defaults or lump-sum repayments occurring at the last minute, which can cause financial stress.
If your business plans to ask for a loan, having these documents prepared can increase the chance of being approved and ensure your line of credit is revolving per plan.
2. Lack of Cash Flow
Cash flow is the very first aspect that a lender looks into when considering granting a company a loan. Banks want to see that a business has enough money to make the loan payments as well as other expenses like rent and payroll. If a company has irregular cash flow or if they experience seasonal variations, these could be a red flag for a lender.
A lack of cash flow is one of the primary sources of business failure. If a lender rejects you for a loan and states cash flow being the reason, it should be a signal to take a hard look at how cash flow is being managed. Implementing accounting software is a good place to start. If that seems overwhelming or if you don’t have the manpower, then hiring an accounting firm could be a helpful alternative to get back on track. Also, be diligent about collecting payments due from customers—don’t let invoices drag out to 60, 90, or 120 days past due. The more proactive you can be, the better off your business will be.
3. Poor Credit or Lack of Credit
The National Small Business Association published a Year-End Economic report for 2017. The report stated that for businesses for which capital availability was an issue, 31% reported they’d been unable to obtain the funding they needed.
Business credit is important for small companies as it enables them to obtain the capital needed to grow. This additional capital might be used to purchase additional inventory, hire employees, and cover other necessary expenses.
For example, a company with a FICO score under 640 is likely to be rejected for a loan. If that company needs a loan, there are a few things they can do to improve their credit score. They can start by paying bills on time, opening multiple credit cards, keep revolving debt low, and regularly monitoring their credit report.
4. Haven’t Been in Business Long Enough
The rate of small business failure may be shocking to learn. Here are some quick facts:
20% of businesses will fail in their first year
30% of businesses will fail in their second year
50% of businesses will fail in their fifth year
70% of businesses will fail in their tenth year
There are many reasons why a business might fail, which is precisely why banks want to see a track record from a company — to prove that they can pay back a loan.
Lenders want to see that a business has experience in the market and brings in substantial revenues. Of course, it’s possible to have a successful and thriving business without having been operating for very long. In this somewhat unique situation, it would be a matter of finding the right lender. If a business owner fell into the more common category of not being incredibly successful from the start, they can use personal assets as collateral to secure cash and have a better chance for approval.
5. Lack of Collateral
Small and midsize businesses can be seen as a risk to many lenders. While not all small business loans will need collateral, it would 100% be required if a business is directly borrowing against an asset. Without secure assets such as equipment, inventory, or property as collateral, your business loan could be denied.
Similar to a business just entering the market, leveraging personal collateral can demonstrate that your dedication to the business while also reassuring the lender. Putting up personal assets, like a house or car, as collateral can lower the interest rate on the loan. If personal assets are not an option on the table, you may need to look into alternative sources of financing.
The process of taking out a business loan can be tedious and complicated for many small and midsize business owners. While these are only some of the possible situations your company might face when seeking a loan, you can always contact Signature Analytics for help. We can assist in securing new lending or ensuring your line of credit is revolving per plan, so contact us today.
https://signatureanalytics.com/wp-content/uploads/BP-hero-4.png248522Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2018-05-16 08:17:352022-10-21 04:52:505 Reasons Your Business is Rejected for a Loan
It’s Tuesday evening, it’s late, it’s raining, and you’re tired. Your last stop before heading home is to the dry cleaners to pick up your clothes, which should be pressed, starched, and ready for that Wednesday morning meeting. As your items are handed over to you, you notice that your favorite pair of pants are missing. Naturally, you begin to cycle through a cocktail of emotions: from disbelief (anything but your beloved pants!), agitation (now what will you wear to tomorrow’s meeting?), maybe even anger (how dare they!), but would you… sue?
If you’re a judge from Washington D.C., that is exactly what you do; for $54 million dollars to be exact.
Consider the fact that over 43 percent of small business owners reported having been threatened or involved in a civil suit. So if you don’t want the pants sued off of you (literally), then making sure your small business is protected should be a top priority. Here’s what you need to know:
Why small business insurance is necessary
Many companies fail to see that insuring their business should be seen as an investment protecting your business, not as an expense. Small business insurance is what helps your business cover its property, assets, income, and employees, against various kinds of losses that can take place.
Types of insurance
It’s always best to think ahead: what are some things that could go wrong in your company? Depending on what industry your company is in can also determine which insurance policies you may need.
All insurance companies are designed to ensure that they take in more than they lose. For instance, you car insurance covers your car, but your policy doesn’t necessarily cover the things in your car. That means you need an insurance rider in addition to your car insurance. Business insurance policies operate the same way. Here are a few policies that your small business may need:
Umbrella Policy
For companies just starting out, the easiest policy you can get is an umbrella policy. Most people don’t have a personal umbrella policy, but they should. A $1 million dollar umbrella policy can cost a business as little $500 per year and will usually come under your homeowner policy.
This policy however does not protect the company from employees who sue the business.
Employment Practices Liability (EPL)
For any company with employees, they should carry this policy. For instance, a company with a constant churn of employees, may experience a higher rate of pissed-off employees. If these employees feel wronged by the company or are experiencing financial hardship, they may turn around and sue the company. If this happens, you want to be sure your business is protected.
Errors and Omissions (E&O)
This insurance policy is for any personal services company. For example, a consultant may fortuitously give a client bad advice. Now that company wants to sue someone because they lost a lot money. That company may not only sue the consultant’s company, but they can also sue the consultant. Anyone who does personal services including doctors, lawyers, or accountants, should always have E&O insurance.
Directors and Officers (D&O)
This insurance policy protects all directors and officers of a company. For instance, a company who sues another company can also sue that company’s officers. Without a D&O liability policy, the company who is suing can also go after the personal assets of those directors and officers. As a director or officer of a company, it’s in your best interest to ask your employer whether they have a D&O liability policy to protect you.
At Risk and Bond
This insurance policy protects companies who offer 401k plans, whether they match or not. Because 401k funds go into a custodian, such as T. Rowe Price or Charles Schwab, if something were to happen, like another Bernie Madoff takes all of the money and runs off with it, it’s not Bernie who owes those funds back, it’s YOU, the business owner.
Why? Because it’s generally the business owner who is the trustee of the 401k and trustees have a fiduciary responsibility. Since 401k funds can hold tens of millions of dollars worth of assets, at risk and bond insurance pays that back. So unless you can 100% prove that you had no idea Bernie was running off with that money, you’re going to be liable.
Establishing insurance
Do you have employees?
Do you own a corporation?
Do you have a 401k?
Do you have a retirement plan?
Most companies don’t have an insurance broker or someone within the company who is a proactive advocate for the business. Since you don’t know what you don’t know, as a business leader, it’s key to start by asking and answering the above questions.
Other questions you may want to know before purchasing insurance policies, is what your current insurance is and when does it renew? Too many companies start with one insurance policy and never change it. Don’t be this company.
The price tag
Many policies are based on gross revenue. General liability is based on gross sales, so the smaller the company the less it will cost to insure it. Some policies have minimums on them, for instance At Risk and Bond may have a minimum of $400 a year. Both E&O insurance and Workers Comp have minimums of $500 a year, however, Workers Comp is based on payroll.
Liability insurance is less expensive, but is almost always based on gross receipts and/or value of all of the assets that a company owns. Insurance companies want to know that if your company gets sued, it has the ability to to defend itself in court. If it doesn’t, the insurance company won’t insure your business.
Additional Insured Certificate
One of the biggest things most companies who aren’t a manufacturer but sell manufactured goods miss is the Additional Insured Certificate. For example, say your company sells soccer balls made by another company. Unbeknownst to you, these soccer balls explode into Skittles when they’re kicked.
A father kicks a ball to his kid, causing his five year old to be hit with a hailstorm of rainbow candies. So the father sues you for selling a faulty product. And your company turns around and sues the manufacturers who created the explosive leather piñatas.
Manufacturers should already have Product Liability insurance, covering the company if their product hurts anyone or fails in any way. So rather than your company suing the manufacturer, you would ask the manufacturer to put your company on their insurance policy. This is called an Additional Insured Certificate. This will ensure that if your company gets sued, you will be covered under the manufacturers insurance policy.
If you’re overwhelmed, unsure whether your company is covered, or even where you should even start, contact us today. We’ll start by asking the right questions relevant to your business and advise you on the next steps.
https://signatureanalytics.com/wp-content/uploads/BP-WP.png347672Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2018-04-05 15:35:252022-11-01 21:15:12Insurance for protecting your small business
Every business is different, but one thing that remains consistent are the barriers that every company faces in terms of its ability to grow. Barriers of growth are all of the obstacles that stand in your way: from your customers (or lack thereof), to your employees, the capital your company does or doesn’t have access to.
If you aren’t sure whether you have any roadblocks preventing your business from scaling, check out these 5 barriers of growth we often see in companies and how to break through them:
Cash flow visibility
One of the biggest barriers of growth is cash flow visibility. If you can’t see whether your company is generating more cash than it’s spending, you’re either in trouble, about to be in trouble, or beyond trouble.
Cash flow issues can result in late payments, which then rollover into additional interest payments and penalties that eat into your profits.
A company’s performance is tied to its cash flow, therefore, insight into your cash flow not only ensures that your company has enough money to cover basic operating expenses, including payroll and monthly utility costs, it facilitates and supports growth. Not only is it critical that you understand your cash flow, your company should take a proactive approach to ensure cash flow never obstructs your growth.
Lack of strategic planning and vision
Where do you see your company 9 months from now? 3 years? 10 years?
A company without a vision not only fails to grow, they will fail to survive. As the saying goes, “if you fail to plan, you plan to fail.” Companies who lack strategic planning often lack structure as well. Disorganized environments can promote stress among your team and, again, lead to turnover from all around unhappiness or layoffs due to underperformance.
A strong strategic plan will help a company to establish relevant goals which allow it to achieve its vision. A strategic plan should include both short and long term goals, with each goal clear to everyone in the company and supported with actionable to-dos and targets.
Creating a strategic plan will help eliminate barriers of growth by giving you foresight into any problems and allowing you to prevent them before they occur.
Your team
You’re only as strong as your weakest link. Therefore hiring employees who aren’t, or can’t pull their weight will affect the growth of your company. When members of your team are forced to pick up the slack of their colleagues, the outcome almost always results in turnover. Companies with high turnover have a harder time recruiting talented employees to fill open positions.
Not only is it important to the growth of your company to hire knowledgeable, experienced, and skilled professionals, but your employees should also be provided with training and leadership to support their growth and allow them to be successful.
Poor customer service
According to Forbes, “businesses are losing $62 billion per year through poor customer service.” So unless you’re Dick’s Last Resort, poor customer service is probably not built into your business model.
Bad customer service can be detrimental to your company in many ways. It can drive down profits, damage your company’s reputation, and can cause you to lose both your current and future customers. A poor reputation will also deter top talent from wanting to work for your company. And since nobody wants to deal with an unhappy customer, you may also lose your employees.
Customers want consistent, timely, and personalized service, therefore providing exceptional service should be a top priority. By talking directly with your customers, promptly addressing problems, and listening to your employees, you can ensure that poor customer service will not be a barrier of growth within your company.
Finding new customers and keeping them
For every one customer you lose, you need two more to support the growth of your company.
So how do some companies continue to scale while others either remain stagnant or simply fail? Because successful companies know their target market. Knowing your customers means engaging with them to better understand their wants and needs, what their pain points are, and how your company can provide the solution.
Maintaining and sustaining growth means finding new customers. And finding new customers requires spending money. This may involve traveling to face-to-face meetings, establishing a budget for online advertising, or investing in training to ensure your sales team is knowledgeable on your product or service.
If your company seems to be losing customers, you need to find out why. Setting actionable goals to decrease and prevent churn will not only help your company retain customers, but keep them happy and returning.
Signature Analytics can work with your team to prevent your company from hitting any barriers that could stand in the way of your growth. Find out how by requesting a free consultation today.
https://signatureanalytics.com/wp-content/uploads/BP-4.png246454Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2018-04-03 14:27:452022-10-21 04:52:525 barriers of growth every company hits and how you can break through them
Most people don’t realize how expensive it can be to run an inventory-based business. And with a bad inventory system in place, a company can (and most likely will) lose sales.
Proper measurement of inventory is a critical element for a business to able to interpret and understand their profit margins. Find out why it’s important for your company to perform regular physical inventory counts and how to account for it.
Companies should always use a system to track inventory rather than an Excel spreadsheet, so if your company is relying on Excel to track your inventory, it’s time to reconsider. Using an Excel spreadsheet can be risky for a couple of reasons:
1) The spreadsheet can crash and cause you to lose data
2) The spreadsheet can get lost
3) General human error caused by manual data input
While a system can crash as well, the possibility of it happening is far less likely than when using Excel.
What is a system? A system can be anything from accounting software (like Netsuite), a CRM, or a thirty-party system like a 3PL (third-party logistics)- a warehouse that tracks your inventory for you. There are also systems like SOS Inventory or Stitch Labs which can integrate with your accounting software.
Whichever system your company has in place, it’s important to also have some sort of manual controls; e.g., someone who can do a physical count.
What are the best systems to track inventory?
The best inventory software to use for your business varies on what you’re looking for and what kind of inventory you have. For example, if you have a really basic item, like you sell widgets, you don’t need to make it more complex than it is. But if you’re building items, like furniture, you will want to consider a slightly more complex system because there are a lot more components that come together. Netsuite, SOS Inventory, and Stitch Labs can do that.
Which channels your company is selling through can also determine which inventory system your company chooses to use. For example, most retail businesses sell both online and in store and will want to choose a system with multichannel integration. Large inventory-based companies will generally spend a lot of money to build their own custom inventory systems.
Who should be responsible for tracking physical inventory?
The size of your company generally determines who should be responsible for tracking physical inventory. Large companies should have an Inventory Manager or someone who manages the warehouse full-time. For small and midsize companies, the responsibility could fall on the company’s operations team to decide who is best skilled to track inventory. This person may be responsible for doing the physical count or answering general questions about what is going on with the inventory. Another option, albeit costly, is to hire a 3PL (ex: a third-party logistics warehouse) to manage your inventory for you.
How often should a company do a physical count?
Regardless of the size of your company, what your company does, or what industry you are in, physical inventory counts are recommended on quarterly basis. However, if your company is in a state of flux (e.g. your business is just starting up) or there are a lot of issues in your system, you may want to do more regular physical counts and perform them monthly or even weekly.
For a company doing counts weekly, they would want to establish procedures. For example, take a box and weigh it; how much does it weigh? If you add a single widget into the box, the difference will give you the weight of each widget. You can then toss any number of widgets into the box, subtract the weight of the box, and then divide by the weight- you can easily determine how many widgets are in the box.
Which costing method is best for your business?
Since costing methods are not one-size-fits-all, here are the four main costing methods and which each best fit:
LIFO (Last-In, First-Out)
The LIFO costing method means the newest item in the door is the first item out. This method is used by companies who want to generate less profit and reduce their taxable income.
FIFO (First-In, First-Out)
FIFO costing method assigns costs to a company’s inventory, valuing the inventory at the end of year by assuming the first items purchased were the first sold. For example businesses whose inventory consists of spoilage (e.g. perishable goods), the first items through the door should be the first items out the door.
Specific Identification
The specific identification costing method is simple and accurate, but is rarely used due to the amount of time and effort it takes a company to scan and enter each piece of inventory into the system. For example, Rolls-Royce may use this costing method to value its inventory since every vehicle is customized and unique to its owner.
Weight Average
The weight average costing method assigns the average cost of production to a product. This method is commonly used by companies whose inventory items are identical to each other or where items are mixed together and it’s impossible to assign specific costs to individual units.
Signature Analytics will not only help guide your company through the inventory process, but can ensure that your business is using the right costing method and tracking systems. Contact us today for a free consultation.
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Download our essential guide to what successful businesses should expect out of their finance and accounting department.
An essential guide to what successful businesses should expect out of their finance and accounting department.
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How did a 33-year-old recruiter from Silicon Valley compete in the halfpipe skiing event at this year’s Winter Games despite having the experience, training, or talent of an Olympic athlete?
Because people who set goals are more successful. Politics aside, Elizabeth Swaney had a clear objective: competing in the Winter Games. Through short-term goals and creating actionable to-dos, Swaney was able to reach her target and accomplish her end goal.
So if goal-setting is the key to making people more successful (and turning average athletes into Olympians), shouldn’t the same logic apply to businesses and their employees?
Yes, as long as that list of goals is more than just a list: goals must be clear to every employee, include a plan of action, and align with the business’ annual (or overall) goals. Here are 5 reasons why setting strategic, quarterly goals are not only important, but beneficial to your business’s productivity and success:
Quarterly goals establish accountability
It’s easy to pass the buck in a company with no processes in place to establish accountability. Each employee within the company should have a list of attainable goals including a clear plan of action that helps them meet each goal.
Quarterly goals help employees prioritize their tasks throughout the year and allow managers to track progress within their team. Creating quarterly goals also gives managers better visibility into each of their employee’s performance, overall productivity, and ultimately increases accountability.
Quarterly goals ensure metrics stay relevant
Running a successful company isn’t just about tracking the metrics relevant to your business. It requires managing and understanding how those metrics align with your company’s overall objectives. While long-term goals may require little change throughout the life of the company, short-term goals will likely need to be revised as the business grows and develops.
Reassessing your metrics as quarterly goals are reviewed will ensure that your company continues to measure what is working or whether adjustments are needed. Your team will also be able to use any new data to change or update their goals and feel confident in their continued success as an integral part of the company’s overall vision.
Quarterly goals help maintain sustainable growth
With all of the challenges surrounding sustainable growth, achieving this goal is not an easy task for any business. Quarterly goals ensures your company maintains the focus that is needed to eliminate any possibilities of running into problems. Quarterly goals can include adding new customers each month while retaining current customers.
With all the challenges surrounding sustainable business growth, actually achieving consistent growth is not an easy task for any business. Setting quarterly goals ensures that your company’s leadership maintains the targeted focus needed to establish critical processes in the earlier stages of success. Doing this helps eliminate the possibility of running into these growth-based challenges in the future.
Alongside these foundation-building goals, quarterly goals can also include proactive measures such as adding new customers or increasing sales each month while retaining current customers too.
Quarterly goals increases employee performance
Setting realistic, short-term goals help employees along their path of professional development. For instance, if quarterly bonuses or incentive-based programs are provided to employees, quarterly goal setting will increase their motivation to perform at a higher level. These goals can be anything from surpassing a quarterly sales goal to reducing departmental expenses.
Acknowledging employees who consistently meet their goals inspires future goal aspirations and creates a culture of celebrating success from within. In turn, this will also boost employee satisfaction and increase company loyalty.
Quarterly goals help to visualize the big picture
Goals, whether long-term or short-term, should all be created with the big picture in mind. Setting quarterly goals helps make those bigger, longer-term goals, feel attainable not only for the leadership team but for every employee responsible to achieving growth-based initiatives. Employees are more adept to achieve success when they have a clear understanding of their role and how their individual goals help drive the success of their company relating to that bigger picture.
Signature Analytics can work with your team to create the goals that best align with your company’s overall business objectives. If you need assistance creating or improving goals to achieve success and drive your business,contact us today for a free consultation.
https://signatureanalytics.com/wp-content/uploads/BP-5-reasons-quarterly-goals.png331643Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2018-03-20 07:23:022022-10-21 04:52:535 Reasons why quarterly goals can benefit your business
What would your business like to achieve this year?
We’re a month into the new year and you’re still finding excuses to put off that budget. This month’s culprit? The Big Game. Or maybe it was school vacation or holiday break. Either way, you see the pattern.
You would be hellbent on finding a team that shows up to the Big Game without a strategy and a plan; why should ensuring your business is set-up for a successful year be any different? So before the keg is tapped and the coin tossed, here are a few budget planning tips to get you started:
1. Create a realistic budget Your company may have ended 2017 with an unprecedented Q4, which makes this year’s goal a clear one: continue to trend that way for 2018. One of the biggest mistakes you can make is to create this year’s budget solely using information from one strong quarter. Be sure to investigate any sudden increases or decreases throughout the prior year.
Building a realistic budget requires determining revenue earned from all streams including fixed and variable costs and any one-time payments that may be coming up. Avoid setting an unrealistic budget by looking for industry trends. Also, look at historical financials and average increases, then use those findings to implement a budget that aligns with your business objectives.
2. Calculate expenses What is the minimum revenue your company must generate to cover your expenses? Before creating a budget, take a look at your weekly, monthly, or yearly expenses associated with running your business including common overhead costs (e.g. rent, office supplies, insurance, and HR). What expenses can your company stand to cut from the budget? This could include negotiating with vendors for lower prices or paying invoices early especially if the vendor offers discounts to reliable customers.
Take a look back at each month and see where your business is coming in at, then make adjustments as needed to find the budgeting technique that fits your business.
3. Take a look at your cash flow statement Is it costing more to run your business then what is currently coming in? Do you know how much actual cash your company has generated? Since a cash flow statement is the lifeblood of your business, it’s essential to know what your cash inflows (receipts) and outflows (payments or disbursements) are when creating a budget. If no one is tracking the cash flowing in and out of the company, your business is setting itself up for failure down the line.
4. Have long-term goals in mind Are you looking at the big picture? Whether you’re budgeting to expand, looking to double revenue by the end of the fiscal year, or planning to sell the company, focusing on long-term goals will work as a roadmap to ensure your business continues down the right track. After determining long-term goals for the company, ensure your team understands those goals and then identify what first steps are needed to support and put those goals into action.
With a two-year old in the house, the word “Dada” is often heard from the waking hours to reading Jimmy Fallen’s book before bed. Recently, I heard on a podcast the word used as an acronym for Data, Analysis, Decision, Actions, and how useful such process can be for entrepreneurs and executives while operating their business.
The following will go through each process and common pitfalls of these items with a focus on accounting and finance along with explanations on how critical each is to the next.
Data
Gathering information from the activities of a business is critical to any operations. Too often we see entrepreneurs using sales orders from their business development team or the amount of cash in the bank to evaluate the health of their business. However, there is more information to be considered including the complete cost of products or services sold, uncollected sales, general overhead expenses, warranty claims, obsolete inventory, and many others.
The remaining steps of the DADA process include ensuring the ability to obtain complete and accurate data from either your accounting system or other systems used. The phrase “garbage in – garbage out” is very appropriate to this step. It is important to ensure that your accounting and finance team have the technology and processes in place to enter the necessary information and produce usable reports. Some questions to ask yourself:
Am I receiving reports on a timely basis or do I have to wait over a month before seeing results of my operations?
The monthly close process should be no longer than 20 days following the previous month end. If the close process is longer than this, it may be due to a lack of appropriate processes or opportunities to introduce technology to accelerate the timing.
Am I often hearing that certain reports are not able to be prepared or the information is not available?
In today’s age there is a plethora of technology available to manage data to produce necessary reports. You may need to reconsider the technology in place and identify new options. With the vast amounts of technologies out there, it is becoming harder for the accounting and finance teams to understand all of the capabilities. The technology in place may be more capable than you realize.
Am I constantly finding incorrect information in reports?
Incorrect information could arise from a number of potential issues. Poor data entry methods can cause regular errors. For example, does someone enter all cash activity into the accounting system rather than uploading a report directly from the bank? Weak internal controls, including lack of a review process, can be the culprit of inaccurate information provided to executives. Consider whether you have the right number of individuals in the accounting process.
When Signature Analytics engages with a company, one of the first areas we focus on is how the data is entered, the processes in place (or lack thereof), and the reports that may be produced. From this assessment, we can identify suggestions for improvement.
Analysis
Assuming that you are confident in the data received, the next stage in the process is to analyze the results and identify areas of concern or positive trends impacting the business. While a balance sheet and income statement are good starts to this process, there are other metric-based reports which should be utilized. Below are several examples of key performance indicators to consider:
Gross margin trending by product line/department Having a strong grasp on the margins of your product or service can help identify when your pricing needs to be adjusted, potential bottlenecks in the process, or if suppliers’ cost adjustments are impacting your profitability.
Break even report Knowing exactly what you need to sell each month to break even from a net income perspective can help business owners make critical decisions on sales team commission plans, adding additional headcount, approving larger purchases, amongst others.
Days sales outstanding trending While sales get the business excited, it’s collecting on those sales that is most critical. Evaluating how long it takes your customers to pay, and whether that time period is extending or contracting over time, can help identify future cash flow issues.
Cash conversion cycle From the day you send payment to suppliers for inventory to the day you ultimately collect from your customers for selling that same piece of inventory, do you know how long it takes? Many businesses do not consider this analysis and are surprised when they learn it takes 6 months to get their cash back. This could be an indicator of poor inventory management, a lack of focus on collections, or a need to review terms with customers and suppliers.
Analysis should be performed on a consistent monthly basis and discussed with the accounting/finance team as well as the operations team. Occasionally we see that analysis meetings focus on exceptions or “one-time” activities in the data. The team should first determine if these are exceptions or if there is an underlying issue in the operations. If they are exceptions, then this data should be excluded from the analysis so that a true picture of the results of operations can be reviewed.
Decisions
The main purpose of the analysis process is to make decisions about the business. Identifying that the company is experiencing collections issues is important, but there needs to be decisions agreed upon to help improve the situation. Decisions by the team should contain enough detail so that the operations team can clearly understand any changes which need to be implemented. Prior to finalizing decisions, the team may need to go back to the Data stage and obtain additional information to confirm that it is the best course of action. Once a decision is agreed upon, it should be treated similarly to how goals are developed using the SMART acronym; specific, measurable, achievable, relevant, and time-based. This can provide the greatest chance of success and help move the business in the right direction as quickly as possible.
Actions
The Data, Analysis, and Decision steps can be an exhausting process and once those processes are completed, everyone may feel enthusiastic about the new direction and conclusions. However, the process isn’t complete.
Decisions on their own do not trigger change within a business; it requires action throughout the organization to create impact. Action plans should be communicated to those affected by the decision along with support for each decision. When team members believe change is occurring solely for the sake of change, they are much less receptive than when they understand the issue. It’s important to set clear expectations for teams to follow, as well as an understanding that members will be held accountable for implementing such actions.
The results of these actions should be evaluated each month to measure progress. This evaluation involves going through the Data and Analysis process again. If more decisions need to be made, then that is the time to do so. One common pitfall we see with businesses is that they go through the process to develop an action plan, then are focused on something different the next month, disrupting progress. Make sure that your monthly agenda discussions include updates on previous decisions made.
Going through the DADA process consistently with your accounting and finance team is a critical part of the monthly close process. If you aren’t currently implementing the DADA process to operate your business, it is time to consider whether you have roadblocks preventing the process.
At Signature Analytics, our team has helped companies improve their overall processes, improving insight into the operations and resulting in necessary changes to allow for growth and success. How would fractional leadership help your growing business?
Accounting is the lifeblood of your business. After all, it’s the department that handles payroll, invoicing, and so many other functions vital to your company’s cash flow. When it’s time to check on your company’s financial health, you turn to your accounting team to provide timely and accurate reports.
Hiring the right accounting employees is, therefore, crucial to operating a business smoothly. While knowledge of accounting skills and practices might have been enough in the past, today’s accounting and bookkeeping professionals need wider skill sets to succeed. Read on to learn which six skills your accounting department must have for your financials to flourish.
1. Understanding of Your Industry
While your accounting employees may be experts in bookkeeping and payroll, do they understand your industry? Software companies have industry-specific terms and protocols that are different from manufacturers. Even seemingly similar companies, such as consulting firms that specialize in different industries, may have differences that accounting employees need to be aware of.
2. Knowledge of Reporting Expectations
Your accounting employees need to be familiar with the reporting expectations at your company. This includes accounting best practices, such as having monthly financial statements ready on a specific day of the following month.
Accounting employees should be willing to take ownership of financial projects and see them through to completion. You should never have to worry about reports not being filed on time or having to review reports for missing or incomplete information.
3. Good Communication Skills
Communication skills are vital for every employee, but especially for those handling your financials. Sometimes these employees might need clarification on a submitted expense. Maybe they need further direction on a project assigned to them. Whatever it is, they can’t be afraid to speak up if they spot a potential problem.
Being unable to ask questions can result in wasted time and avoidable errors that can affect your reporting and accounts. What if, for example, an employee incorrectly records an expense in your accounting software because they’re new to the system and didn’t ask for assistance? This could cause problems later down the line. And that brings us to our next point: using technology.
4. Tech-Savviness
Tech-savvy employees are a must-have in the modern accounting world. General software and accounting-specific programs like QuickBooks are used on an everyday basis. What’s more, employees must be able to adapt to new technology if they decide to switch programs or upgrade the business systems.
Employees should also be able to identify errors or inconsistencies when using technology. What if a spreadsheet formula is referencing an incorrect cell? What if they notice a fellow employee is recording transactions improperly? These small slip-ups can become more serious problems if your accounting department doesn’t catch them right away.
5. The Ability to Optimize Processes
Great accounting employees are always looking for ways to improve processes for themselves and their co-workers. These can range from minor changes to forms to complete overhauls of internal reporting. You should already have a business environment that encourages employees to pitch their own ideas, and the right employees will make sure their ideas are heard.
6. Excellent Customer Relations
Today’s accountants and bookkeepers are oftentimes the main contact point between your business and clients and vendors. People skills are a necessity whether an accountant is following up on payments or has questions about purchase orders.
Not only do friendly staff enhance the reputation of your company, but they can also help identify new business opportunities. What if your bookkeeper, during a friendly conversation with a client, hears their business is growing? If your company handles products, this might be an opportunity to increase your orders. For services companies, this could mean being able to move the client to a higher tier of offerings. Either way, having an accounting employee with excellent customer relations could pay off.
Finding the Right Accountant for You
Accounting requires careful attention to detail. You should be able to trust your employees to produce accurate statements for your unique company. That’s why accounting employees need skillsets far beyond the ability to number-crunch.
If you’re in need of highly skilled accounting employees, outsourcing could be the perfect solution. Contact the expert team at Signature Analytics today to learn how we can help get your business on track for financial success.
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Building and growing a successful business requires a solid strategy grounded in facts. The shrewd business owner knows how vital it is to use accurate data to guide smart decisions.
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Building and growing a successful business requires a solid strategy grounded in facts. The shrewd business owner knows how vital it is to use accurate data to guide smart decisions.
Take a look at the enlightening statistics we’ve collected to help you plan realistically for your business’ future.
Capital Is King
82% of businesses fail for lack of money, and 55% of business owners peg cash flow as the number one challenge to growing their businesses.
Tip: Successful business owners are cash savvy and use tools to track and analyze cash flow. From choosing the right software and hiring the right talent, to simply understanding all costs associated with business processes, use tracking and analytics to maintain a tighter grip on your capital.
Finding Funding Is Tough
More than 60% of business owners worry about how they will finance continued growth.
Tip: There are a number of financing options available to medium-sized businesses. In addition to loans from banks and other financial institutions, you might consider accounts receivable factoring, purchase order financing, equity issuance, or using assets to secure a line of credit.
The Talent Pool Is Shrinking
77% of CEOs fear that a lack of available talent will stunt company growth.
Tip: Smart CEOs are looking for soft skills on top of credentials to ensure they’re hiring the right people. When they find what they are looking for, they go for it. The job-seeker may have a lot of negotiating power, but your business will end up with the talent it needs.
Growth Requires More Than Money
⅔ of the fastest growing companies fail to become self-sustaining.
Tip: While financial success is necessary, that alone will not sustain your business. Setting up processes for continuous innovation is essential to keep your business growing long-term.
As a business owner, your priorities should be to exercise mindful cash flow forecasting, explore your options for financing, make smart hiring decisions, and support innovation.
With these four tips in mind, your business won’t stay stuck on that bottom step — it will climb step by step into the future.
https://signatureanalytics.com/wp-content/uploads/Asset-49.png6761014Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2017-05-15 09:00:142022-10-21 04:52:59The Statistics You Need to Grow Your Business [Infographic]
Owning a business is hard, particularly in the first half-decade of its existence. In fact, 20% of businesses fail in their first year, and another 30% collapse by the end of year five. The good news is that with the right strategy and a watchful eye on your business income and expenses, you can avoid closing your doors. The key is to be aware of potential problems and to quash any existing issues.
Below you will find the 3 most common factors that determine the success or failure of a business, so you can start protecting the health of your company today.
Cash Flow Problems
Insufficient cash flow is one of the leading causes of businesses throwing in the towel. Proper cash flow management ensures that everything else in the business operates smoothly. This extends from stocking up on inventory to paying salaries and utility bills on time. It’s also important to keep records of who owes you money and when you should receive it.
Consistently analyzing cash flow statements will allow a business owner to stay on top of accounts. Whether you use a cash or accrual accounting system, it’s vital that you know how much you have in hand and what you expect to pay out in the near future. This will give you a broader idea of what to expect with your business, ultimately allowing you to keep afloat. If you don’t feel comfortable taking on this task alone, you should hire a firm to help you manage your business finances; there’s just too much at stake not to take action.
Poor Management
As a business starts to find its footing in a given market, it becomes crucial for management to have clear communication and expectations for its employees. Without adequate and efficient project management from the top, personnel aren’t able to efficiently handle the stresses of the required workflow.
By setting clear expectations on a day-to-day basis, employers are given a better chance at managing workflows utilizing the tools at their disposal. Consider allocating a time slot on a weekly or biweekly basis to touch base with your team. You can also arrange a more thorough meeting at the beginning of each fiscal quarter for long-term goal-setting. This approach increases workflow effectiveness by fostering healthy accountability standards within your team.
Expedited Growth
Losing the ability to adequately handle growth in your company is one of the most stressful situations a new business can fall prey to. By expanding operations too soon, companies run the risk of sacrificing efficiency as they are unable to keep up with production. At the same time, they lose capital from not fulfilling client needs and expectations.
As a business owner, your goal is, first and foremost, to create the best client experience possible. So take the necessary steps to make that happen. This may mean delegating many of the tasks you’ve always done on your own. By hiring people you trust, whose passions align with your business message, you can fill the void in the areas outside of your reach. It is also incredibly important to ensure that your staff are adequately trained for potential growth-related problems. Sometimes this is achieved through trial and error, but it’s always best to be prepared whenever you can.
With all the pitfalls lurking throughout the life of your business, it’s easy to get discouraged. But remember: for every 20% of businesses that fail within their first year of operations, another 80% succeed. By reflecting on these 3 factors of failure, your business can join the ranks of the majority and last for much longer than that one-year mark.
Each time your accounting team delivers you a profit and loss statement (P&L statement), they’re handing you key insights about your business’ profitability. A P&L statement, also known as an income statement, measures your business’ financial performance over a specified booking period — generally one month, one quarter, or one year.
While many business owners and managers feel overwhelmed at the wealth of data on the P&L statement, interpreting this data is essential to making informed business decisions. The good news is, you don’t need to learn how to calculate financial data — that’s what your professional accounting team is for — but you should understand how to read your P&L statement, and use the information to guide your business decisions.
You’ll see a lot of accounting-specific terms in this statement, but once you understand what they are (and how they relate to your business), the document isn’t too difficult to read.
We’ve broken down each section of the P&L statement below, to help you interpret what the numbers mean for your business.
Revenue
Revenue is often referred to as the “top line,” because it’s the very first line you’ll see on your profit and loss statement. Revenue constitutes the sum of all sales, and acts as the base of the entire spreadsheet.
COGS
The Cost of Goods Sold (COGS) represents the costs directly related to making the goods or services your business sells. These costs range from labor needed for production to the cost of raw materials. As a business owner and leader it is important to define and track your COGS and to have enough detail in the COGS to understand the key components of your goods or services.
Gross Profit
Once you know revenue and COGS, you can calculate your company’s gross profit, using this equation: Total Revenue – Cost of Goods Sold (COGS) = Gross Profit. This is also referred as your operating margin or gross margin. It is a key metric to benchmark against your industry.
Your gross profit is then used to pay the remainder of the costs on your P&L statement.
Selling, General and Administrative Expenses (SG&A)
SG&A can also be referred to as OPEX (short for “operational expenditure”). SG&A includes all expenses to market, sell, and deliver a company’s products and services, as well as the costs incurred to manage the overall company. This includes all compensation for the business’ employees (with an exception for labor costs already accounted for in the COGS bracket). This category will also contain office-related expenses, travel and entertainment expenses, non-COGS related consultants, bad debt (such as unpaid invoices), and other administrative expenses.
Earnings Before Interest and Tax (EBIT)
EBIT reflects the company’s productive efficiency, before taking into consideration the tax burden or how the company is financed. EBIT, also called operating income, is calculated with the following formula: Gross Profit – Total OPEX = EBIT.
Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA)
This calculation simply takes the EBIT, and factors out depreciation and amortization, to get a more clear understanding of current performance. EBITDA is used by investors as a proxy for cash flow, and for the amount of profit that can be made from a business’ current assets and operations.
Net Earnings
At the bottom of your P&L statement, you’ll see Net Earnings — aptly referred to as your “bottom line.” Net Earnings may also be called Net Income, and shows the profit of your business. This grand total represents the actual “take-home pay in your company’s pocket,” once all sources of revenue, expenses, interest, and tax are taken into account. This amount is divided among shareholders or added back into the company as retained earnings.
Acting on the Numbers
Think of your accounting team as your own personal financial translator; using their skills and expertise to take your company’s raw financial data, and present it in a format that’s easier to understand and act on. While you can leave the data analysis to those who do it best, the task of reading and interpreting the P&L statement isn’t just a job for your accounting department; it’s essential to the decisions you make as a leader.
Your profit and loss statement is one of the greatest tools at your disposal, whether you’re a veteran business owner or a startup entrepreneur. Because each statement focuses on one specified booking period, you can compare multiple P&L statements from previous periods, to see whether your business’ profitability is increasing or decreasing over time. With this statement consistently updated and on hand, you have a clear breakdown of your business’ costs and revenue — allowing you to make informed decisions about staffing, spending, and production for future success.
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In case you missed them, below are the most popular articles in 2016:
#1Signature Analytics Named an Inc. 500 Fastest-Growing Company with Over 866% Growth! Signature Analytics is thrilled to be named an Inc. 500 Fastest-Growing Company! Inc. ranked the top 5,000 fastest-growing private companies in the nation according to percentage revenue growth over a three-year period. The top 10% of companies, the Inc. 500 will be featured in the September issue of Inc. We are honored to be an Inc. 500 winner!Read this post →
#3Signature Analytics Appoints Peter Heald as Chief Executive Officer
Peter Heald has joined Signature Analytics as Chief Executive Officer. Pete is an innovative executive with over 20 years of experience in developing leadership teams, driving profitable revenue, and growing companies. Pete’s background includes investment banking and a variety of leadership positions and experience in service firms locally and nationally. Pete’s impressive resume, along with his passion for growing businesses, make him an excellent fit for Signature Analytics. Read this post →
Key performance indicators (KPIs) help measure the effectiveness of accounting within your organization. By tracking KPIs, you can better understand the condition, sustainability, and trends within your accounting department and keep a close handle on your business’ financial health. Read this post →
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Key performance indicators (KPIs) help measure the effectiveness of accounting within your organization.
By tracking KPIs, you can better understand the condition, sustainability, and trends within your accounting department and keep a close handle on your business’ financial health.
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Many owners and managers are hearing about Part-Time CFOs for small to mid-sized business, so what are the benefits of such a solution? Let’s discuss the why, what, when, as well as the goals, for a Part-Time CFO, also known as an interim, fractional, or outsourced CFO.
Why Use Part-Time CFO Services?
Hiring full-time employees is very expensive and can be risky. With the advent of cloud-based tools that make collaboration easier, companies can now have ready access to a Part-Time CFO resource. Accounting departments are typically busy and at capacity with the day-to-day tasks of the business. A Part-Time CFO offers built-in efficiencies in purchasing the skill sets and bandwidth needed at any particular time.
What Do You Get with a Part-Time CFO?
With a Part-Time CFO level resource, there is increased oversight of the accounting department. Through the development and refinement of policies, procedures, and technology, a company can benefit from increased efficiencies, reduced timelines, and added scalability. The company also benefits from a higher level analysis with the additional reporting metrics of projections, profitability, and scenario planning. The CFO role improves the communication with lenders and investors and supports the operational functions of the business with robust data reporting and metrics. In small to mid-sized business, they will often be very hands on, and possess excellent communication skills.
When Should You Start Part Time CFO Services?
There are some distinct indications that it might be time to consider a CFO role for your company. If timely and accurate financial results needed to make business decisions are consistently delayed or inaccurate, it is time to add additional bandwidth to the department. This can often be caused by rapid growth, or the number and complexity of transactions increase. Lenders, investors, customers, and vendors may request detailed and specialized reporting, or when the engaged CPA firm may be requiring additional schedules and data. If the company is preparing for some type of exit, succession or transaction, having the CFO resource available to assist and guide the due diligence activity can ensure a timely and accurate process.
Final Thoughts
The goals of hiring the CFO function can usually be summarized by quantifying and reducing risk to the organization, lowering costs to increase profitability and cash flow, and ensure that the long term company strategy is executed and results realized. By utilizing a Part-Time CFO solution, business owners and managers can realize these benefits at an earlier stage and more cost-effectively than waiting for a full-time CFO role to develop.
We Can Help
If your business could benefit from Part-Time CFO services, contact Signature Analytics and we would be happy to discuss our outsourced CFO services. We will set up a consultation to learn about your specific business needs and can discuss the best outsourced CFO services for you!
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As a business owner, one of your goals is to maximize your multiple and to do this you must know your company’s market value. But how do you acquire this information? We recently sponsored a seminar with InfoVera™ that focused on Total Enterprise Value Opportunity (TEVO) for business owners. InfoVera is a Market Value Reporting Agency and was founded to help businesses realize their company’s market value.
Through InfoVera, a company can learn their TEVO Score. InfoVera Co-Founder, Sandy Burton explains, “First and foremost, a business owner should always know the value of their biggest asset and what factors will improve or decrease it. And it starts with answering the question “what’s my multiple?” The TEVO Score is the simplest and most straightforward mechanism to answer that question.”
What is your TEVO Score and what does it say about your business?
Your TEVO Score is acquired through a predictive analytics engine and will quantify the opportunity gap between your company’s current and potential value and provide insight on how to increase value. After a business learns their TEVO Score, InfoVera can refer them to partner with companies such as Signature Analytics, to provide financial analysis services to help companies turn insights into actions.
The TEVO score has the same scale as your credit score and, like FICO, it is comprised of 5 weighted factors:
Financial Analysis
Business System and Processes
Base Business
Management Team
Opportunities
What can you do to improve your TEVO Score?
Since your TEVO Score gives you insight into your company’s past, present, and future, you can use it as an opportunity to analyze future opportunities to increase company value. You need to look at where the company is going, and make that visible to outsiders looking at your business for investments, partnerships, potential buyers, etc. Signature Analytics can assist in improving your TEVO Score by providing the actionable financial analysis you need to strengthen business systems and processes, diversify customers and sales force, strengthen the management team, and look for opportunities for growth, increased margins, integration, and expansion!
How does your TEVO Score help maximize your business valuation?
You can’t maximize your business value if it is unknown! Your TEVO Score provides a standard way to make your multiple known and through that, the market value of your business known. This tool provides you the knowledge of your current valuation, potential future valuation, and the opportunity gap in-between. When you increase the understanding of your business and know the factors that impact your multiple, you are able to take the necessary actions to maximize your valuation.
We Can Help
If your business is ready to learn its market value and TEVO Score, contact InfoVera. They can provide your company’s TEVO score at no charge or with additional information develop your Marketability Assessment which will validate your score and provide areas of focus for you to improve your market value. To improve your TEVO Score, contact Signature Analytics! Our goal is to provide the highest quality accounting and finance expertise so you can make the best possible decisions for your business based on accurate accounting and financial analysis!
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A survey by Desjardins Financial Security showed that money is the main cause of stress outside of work. Nearly half of the respondents cited money issues as their top stressor. I often hear from clients how frustrated they are with their current financial position. They feel lost and they are not sure how to create a plan to track their cash flow. This can create fear and stress, which in turn makes it difficult to have balance in the workplace.
Before you can determine your current financial position and set realistic goals you must understand your current financial situation. You also need tools to help track your progress. Timely and accurate financials are the first step to gaining control. They help you to identify potential problems and help you to make better-informed decisions. Financials also help you to set goals so that you can project your cash flow, allowing you to be proactive with your finances rather than reacting to what already took place. Signature Analytics can provide the financial analysis services you need to better understand your financials and create an action plan to help create balance.
Selecting the Right Accounting Reports
There are two accounting reports that are essential to monitoring your financial position.
The balance sheet describes your financial position—the assets you hold, less the debts you owe, equal your net worth (general level of wealth)—at a given point in time. This planning tool helps you track the progress you’re making in building up your assets and reducing your debt.
In contrast, the income and expense statement measures financial performance over time. It tracks income earned, as well as expenses made, during a given period (usually a month or a year). You use this tool to compare your actual expenses and purchases with the amounts budgeted and then make the necessary changes to correct discrepancies between the actual and budgeted amounts.
The Balance Sheet
A balance sheet has three parts that, taken together, summarize your financial picture:
Assets: What you own
Liabilities, or debts: What you owe
Net worth: The difference between your assets and liabilities
The accounting relationship among these three categories is called the balance sheet equation and is expressed as follows:
Total assets = Total liabilities + Net worth (or) Net worth = Total assets + Total liabilities
The Income and Expense Statement
The income and expense statement, otherwise known as the profit and loss statement, has three major parts that help you to determine the cash surplus (or deficit) or your business.
Cash in-flow = revenue
Cash out-flow = expenses
Cash surplus (or deficit) = net profit (or loss)
A cash surplus (or deficit), otherwise known as the net profit of loss, is merely the difference between income and expenses. The statement is prepared on either a cash or accrual basis.
On a cash basis, the only activity reported are transactions involving actual cash receipts or actual cash outlays. The term cash is used in this case to include not only coin and currency but also checks and debit card transactions drawn against checking and certain types of savings accounts.
On an accrual basis, you match revenue with expense regardless when the cash may or may not be collected. If you sell a product to a customer and he doesn’t pay you for 30 days, the sale is recorded in the books on the day that you made the sale. When the money comes in the “accounts receivable” is then turned into cash. The same with expenses: if you incur an expense on one month but don’t pay until the next month, the expense will be recognized in the month in which you incurred the expense.
We Can Help
Signature Analytics can provide outsourced accounting services to keep your activity up-to-date so that you can have accurate monthly financials. We can help project your cash to see deficits before they happen and to create a budget to project for these shortfalls. Knowing about this ahead of time can assist you to make different choices, such as reducing expenses, increasing revenue – setting sales goals to track your progress, and finding lending resources such as a line of credit or business loan. The Signature Analytics team can help to facilitate solutions relating to business problems to increase productivity and profitability, including setting up job costing, track labor costs, track revenue items, and overhead. Although we cannot eliminate all stress, getting your finances under control is a great first step in bringing balance back into your business. Contact us today!
https://signatureanalytics.com/wp-content/uploads/Screen-Shot-2016-07-29-at-8.38.17-AM.png5671142Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2016-08-10 11:04:242022-10-21 04:53:09Being in Balance Through Understanding Your Financials
One of the biggest obstacles in business is predicting cash flow and influencing the future of your company. Business owners may become paralyzed when they review their financials. Understanding your numbers will help you be proactive about your company’s future and confident in the decisions you make. Let’s take a look at some common questions business owners may have regarding their financials and learn the top ways to unleash the power of your financials!
Is there a better way to manage cash flow?
Trying to run a business without cash flow management is like trying to paddle a boat without an oar. Even if you succeed, it will be an upstream exercise guaranteed to wear you out. The three key elements of your cash flow analysis include:
Accounts receivable: What customers and clients owe you.
Accounts payable: What you owe your vendors.
Shortfalls: (You hope not to have these, but they do happen.) Determine your break-even sales and use your breakeven point as a benchmark.
You must effectively manage all three if you want to navigate your business to success. Of course, the best direction to paddle a canoe is with the current. You’ll go faster and won’t wear yourself out. By the same token, your business will be healthier if you manage your cash flow toward the profit line.
Are my products and services profitable?
One important number that business owners tend to overlook is their Gross Profit (GP) Margin. The gross profit margin is your sales, minus cost of goods sold. The amount remaining is the profit on sales, after the costs directly related to the sale of the service or item are deducted. Some notes about gross profit margin:
The greater the GP margin the more profitable the company is before fixed costs (overhead)
Helps the business owner to determine if they are pricing their services correctly and controlling their cost of goods sold (labor and materials)
Increasing sales does not always improve cash flow
Set a GP margin target and monitor your results each month — track your GP margin over time to ensure it does not deteriorate and lead to cash flow problems — being proactive and not reactive
GP margin helps the owner to determine their break-even sales by dividing the total overhead expenses by their GP %
How do I know how my business is performing?
Have you ever heard the adage “Garbage in, garbage out”? Well, it is true! In order to have confidence in your financials, you have to make sure you have captured all of your revenue and all of your expenses in order to see the full story. One way you do this is reconciling your cash and liabilities.
Reviewing your bank balance online DOES NOT give you a full and accurate picture of your financials! If you are using your bank balance to determine your cash flow you will run into complications. Your bank balance does not include activity that has not cleared. Reconciling your cash on a daily basis is extremely powerful. If you are reconciling all of your accounts on a daily basis, you will have a better handle on your key metrics. Think about the power of daily reconciliation for a minute. If everything is updated every day, that means you have real-time access to all of your key metrics. If you knew your real cash balance daily, instead of just your bank balance, would that be valuable?
As important as it is to know your cash balance, it is equally important to have an accurate budget. I call it “creating a financial road map.” It is important to predict the future of your company. Big decisions are difficult to make, and once you commit to a decision it is difficult to change course.
One of the most important year-end tasks for most businesses is to work on next year’s budget. Often though, this process is misunderstood. It is not only a financial exercise for the future, but also a way for a business to evaluate their prior performance. As the year draws to a close it is important to take a look at how far you have come and what you have learned along the way. It is important to review your accomplishments. You should celebrate the areas in which you improved and review how they impacted your business. Doing this will help your determine your goals and set your path…however in order to evaluate your performance you must understand the story behind your financials.
How can my business financials help me make better decisions?
Have you heard the expression “Numbers don’t lie?” It’s true, they tell your story — don’t be afraid to pay attention. Knowledge is power. In order to know your cash flow you have to know your numbers. Before you can determine your current financial position and set realistic goals you must understand your current financial situation. You also need tools to help track your progress. Timely and accurate financials are the first step to gaining control. They help you to identify potential pitfalls and help you to make educated and informed decisions. Financials also help you to set goals so that you can project your cash flow, allowing you to be proactive with your finances rather than only reacting to what already took place.
It is important to understand the numbers behind your business. They tell you a story. They show trends and performance. They can help you to make proactive decisions for the future, instead of reacting to the past.
What financials are important and how do they apply to my business?
Reading your financials and accounting reports is like reading a novel…every chapter tells a part of the story! It is important to not only review your financials but you also need to know how to read them. How does your company stack up against competitors? How has your revenue and expenses changed over time? Ways to review your financials include:
Profit & Loss Summary Prior Year Comparison: Most business owners rely on the Profit & Loss Summary report, but comparing your results to last year can provide quick insight into whether your revenue is growing — as well as how fast expenses are rising.
Balance Sheet Prior Year and Prior Month Comparison: As with your income statement, it’s important to compare where certain balances stand now versus last year: Cash, Accounts Receivable, Inventory, Accounts Payable, Other Liabilities, such as lines of credit or short-term loans and review the changes.
Budget to Actual: Great report to track your progress by comparing your actuals versus what you budgeted. It helps you to manage your cash month to month.
Statement of Cash Flows: The Profit & Loss reports enable you to see what you earned, while Balance Sheet report helps you determine what you have — as well as what you owe. However, neither report necessarily provides a clear picture of where cash is coming from, or going to. For that, you should look to the Statement of Cash Flows report. This report allows you to see:
How much cash you’ve taken in from sales and spent on expenses
Cash inflows or outflows from borrowing, repayment, or investing activities. In short, this report shows you exactly what caused your bank balance to increase or decrease during a given report period.
Profit by Customer and Product: What are your revenue generators and what do you need to more closely track?
We Can Help
Accounting is known as the language of business. Understanding your financials unleashes the power to make better decisions and drive your business towards success. Contact Signature Analytics to schedule a free business process review and learn how we can assist with your financial analysis and outsourced accounting solutions!
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When you want to start a new company, what do you do? Often times, people think it is as simple as calling their CPA to register a company, or calling an online legal service and selecting a legal entity that sounds good. Here at Signature Analytics, we have heard of clients using these services to start a company. While having a legal entity is your ticket to play in the business game, there are many other factors you must consider!
To name a few, there are implications on your tax, personal asset protection, capital raise capability, and even exit strategy. First, you must determine what legal entity makes the most sense for your company. To start, let’s touch on the different types of legal entities:
Legal Entity Types
Sole Proprietorship
Limited Liability Company “LLC”
S Corporation
C Corporation
1. Sole Proprietorship
Income on 1040 Schedule C
Single ownership
Self-employment tax on income
Unlimited liability
Cannot sell entity interest, only assets
As a sole proprietor, you file your business income as part of your personal tax return Schedule C, and you have to pay self-employment tax on your income. You have unlimited liability in the event of a claim against you.
2. Limited Liability Company (LLC)
Articles of Organization, Operating Agreement
Foreign owner(s) ok
Treated as partnership unless election made
Flexible to elect entity as C Corp, S Corp for tax purpose
Limited liability to members’ capital contributions
An LLC allows you to have foreign owners/investors. For example, you may elect that the entity is to be taxed as a C Corp, S Corp, and you have liability limited to your members’ capital contributions. Please note that owners in an LLC are considered “members” not “shareholders.”
3. S Corporation (S Corp)
Articles of Incorporation with annual shareholder meetings
Limit on type of # of owners
Corporate return filed
Flow-through on income/loss to owners based on ownership %
Limited liability to shareholders’ capital contributions
Flexibility on sale structure
S Corp requires you to have an annual shareholder meeting. You also cannot have a foreign owner in S Corp. Corporate tax return must be filed and any income/loss will be flowed through to owners based on % of ownership. Liability is limited to your members’ capital contributions.
4. C Corporation “C Corp”
Articles of Incorporation with annual shareholder meetings
No limit on type or # of owners
Corporate return filed
No flow-through to shareholders
Double taxation on $ to owners (salary or dividends)
Limited liability to shareholders’ capital contributions
Flexibility on sale structure (asset vs. stock)
C Corp has no limit on the number of owners, local or foreign. There is no flow-through of income/loss to shareholders, but there is double taxation on money distributed to owners in the form of salary or dividend.
For companies with a social calling, i.e. giving a part of their income for philanthropy purpose, they may elect to be a B Corp. A “B Corp” is essentially taxed like a C Corp but gives Board and Management legal protection as it might be perceived that they are not “maximizing” the shareholders’ value through their corporate giving. For all tax and legal implications on each entity, please make sure you talk to your tax or legal advisors, as the above is a quick overview and not meant to address each owner’s unique situation.
Preferred Entity Choice
Depending on many factors and timing, most investors ultimately favor C Corp status. So as your business continues to grow and/or you are planning to solicit capital infusion from accredited investors, you may want to consider future conversion of your current legal entity to a C Corp. Please note that conversion may be more than just completing a few forms, so it is crucial you talk to your tax advisors first to confirm any tax consequence.
We Can Help
It is essential to get your books right from the start! While choosing a right legal entity is important and thinking about an exit strategy is exciting, at the end of the day, if you don’t run your business properly, nothing else matters. There will be no exit strategy to talk about! With financial discipline, you could leverage your accounting and finance team to help you achieve success faster and better. At Signature Analytics, we can evaluate your accounting and finance needs and help determine the best strategy for your company, no matter what stage your business is at. Contact us today to learn how we can complement your existing team or act as your entire Accounting department!
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It is difficult to accomplish goals without a plan. Think of the last time you wanted to lose 10 pounds. You likely planned out your meals, picked which days you would go to the gym, and got yourself into bed early, so you were rested each day. All of this encompasses a plan; without one, you likely wouldn’t have been able to achieve your goal.
Just like you, your business also needs a plan. Strategic financial planning is required for any company to be successful. It’s a roadmap to understand what direction your business is heading and why. It can also help you plan for some of life’s unexpected happenings, like a recession.
Financial planning strategies for your business can help you determine where to spend money, time, and other resources. It should include specific goals to help you reach your dream. To help identify each unique point within the strategy, you should utilize various tools such as forecasting, budgeting, cash flow analysis, and key performance indicators. Let’s break down exactly what should and should not be included.
What Valuable Questions Should I Consider First?
First, let’s start by answering some common questions that can help guide your direction:
What are the goals of ownership? Do they want to sell the company in 3-5 years or hold and operate for 20 years?
What are the key metrics that drive profitability to the business?
What are the key metrics that drive value to the business?
Do they understand the profit margins of the business in total and by revenue stream?
What is the cash conversion cycle of the business? (How long it takes for cash outflows to turn into cash inflows, i.e., cash paid for product to cash received from the sale of product.)
It’s essential to take the time and consider the answer to each of these questions. These responses can give you a clue as to where to begin in the process. To help guide you on the strategic and financial planning process, we have broken down tangible steps to help get you there.
Figure out where you are: Use your resources to conduct internal and external audits to help better understand the marketplace. Are you at the top of your industry or floating somewhere in the middle? Maybe you are at the bottom, and that is ok too, so long as you know where your business stands currently. This process can help you reach the next step. Have a clear understanding of what you are great at and what your competitors are doing too.
Focus on what’s important: What is it about the business that will get you to the next rung on the ladder? What do your customers come to you for and praise you for doing? What is your company’s mission? Once you identify these main points, you will understand what your team and financial business plan should ultimately be focusing on right now.
Define your objectives: Now that you know what you should be focusing on, also consider areas that your company has been “distracted.” What teams or committees are taking away from the main objectives? Zero in your attention on what is most important and focus all your efforts there.
Put people in charge: How many times has a project fell through because no one was championing it? Use your team to your advantage and make people accountable for their projects that focus on your company’s objectives. Accountability is a true key to success in your company reaching its goals.
Circle back: This plan, if done correctly, will work for now, but not forever. It is vital to set up a timeline to check back in with your team on their projects to ensure your company is hitting its goals and objectives. Maybe a quarterly check-in is what is best for your business or, perhaps, it’s yearly. Whatever cadence you set up is based on your companies needs; just don’t forget to review the strategic plan every so often.
Once a financial plan development has been made for your company, an annual budget should be created. When creating a budget, it is important to look at the income statement, but also the flow of activity driving the balance sheet, and then ultimately the timing and flows of cash.
For many of our clients, in addition to the budget, we use a rolling forecast model, which is updated monthly based on the most recent company information available. This allows us to have clear visibility into our clients’ cash position for a minimum of 90 days in advance at all times. This way, we can help ensure there is appropriate cash and business planning can be made proactively in advance.
Key Performance Indicators (KPIs) can then be developed to focus on driving profitability, value, or both to the company. Examples of KPIs may include tracking the average days outstanding in Accounts Receivable in which continued improvement over time will increase cash flows of the business. Another simple KPI to track would be gross margin by product or service line. By knowing this information, the management of the company can make decisions to improve these metrics over time.
KPIs should be included as part of an ongoing scorecard and reporting package (monthly at a minimum) that management reviews. Management must develop KPIs that can be translated into actionable insight and ultimately to action. An action plan should be established at each meeting based on the movement in the KPIs, continuously focused on improving the KPIs over time. The action items should then be reviewed at the next meeting for progress, at which time new action items are then created.
In short, know your goals, develop a plan, budget, and forecast out your plan, develop trackable metrics, and then execute on your plan. Want to break down the process even more? Read our blog on planning a strategic budget that sticks.
We Can Help
Contact us to see how Signature Analytics can assist in identifying your goals, developing a plan, and developing metrics to execute your plan. Our talented, experienced accountants and financial analysts can complement your existing accounting employees, or act as your entire accounting department (CFO to staff accountant).
We provide the ongoing accounting support and financial analysis necessary to more effectively run your company, analyze operations, and guide business decisions to help you grow.
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IT managed services have recently taken center stage in the fight for global acceptance as cloud-based solutions and an outsourced IT model gain popularity. Cyber threat management, data protection and privacy, and compliance to third parties have shifted priorities from a “do-it-yourself” mindset to one of collaboration and strategic partnering.
So what does that have to do with “fractional accounting?” And why is that relevant to CEOs, Presidents and Business Owners? All excellent questions as we segue into the mainstream.
Large Fortune 2000 businesses can easily afford the services of a full accounting and finance team. From CFO to staff accountant, the complexity of basic operations combined with the need for significant financial and data analysis requires the continued due diligence of a high performing team. In a highly competitive landscape with reputations on the line, access to real-time, accurate, and complete financial data must be at the executive’s fingertips.
CEOs and CFOs realized their existing ERP and conjoined legacy applications housed vast amounts of data they were incapable of mining. This trend laid the groundwork for the “Big Data” revolution, and you saw a host of predictive and prescriptive analytics software companies continuing to break new ground to fill the need. Fully staffed teams became the norm, and fee-based recruiting agencies searched for potential hires.
But where does that leave small- and mid-sized businesses? They do not have the luxury or the cash flow to bring on a full-time CFO complemented by a Controller, Senior Accountant, and Staff Accountants. So the void is filled out in many inefficient, and sometimes dangerous, ways:
Hire a Full-time CFO….and pay $150,000 and up for accounting services. This figure is much higher when you add the employer payroll taxes, employer portion of health insurance, vacation, bonuses, and more. We often see this situation with our clients. The CFO is relegated to managing and executing the accounting function, which is not a good use of his or her time. Plus, it’s expensive. And as the CFO gets buried under more and more accounting work, business owners find that they’re not getting the high-level financial analysis they needed in the first place. Not to mention the high likelihood the CFO will ultimately quit to pursue greener pastures.
Hire an Office Manager….and let them do the accounting. We see this in about half our clients, and it is met with good intentions. An Office Manager works double duty managing the office and running the accounting department, which seems like a cost-effective way to kill two birds with one stone. Alas, these individuals rarely have accounting degrees, let alone their CPA, and we typically find a host of problems – incomplete or sloppy work (not on purpose), timing issues, inaccurate financial statements, unreconciled accounts, looming tax issues, and more. Combine that with the high likelihood your CEO is unknowingly going down the wrong path because they do not have the financial planning and analysis needed to make the right decisions. This is dangerous – it’s what you don’t know that can kill your business. Cash is king, you only have so much cash to run your business, and steering the ship in the right direction is vital to your continued growth and success.
Leading small- and middle-market businesses are leveraging the high value and low costs that fractional accounting provides to turbocharge their accounting and finances.
Fractional accounting is high value and cost effective at the same time, which makes good business sense to consider. Business owners are demanding more from their accounting function, and expecting financial planning and analysis to help them make the right business decisions. The growing need brought about a new paradigm as leading companies turned to a fractional accounting model.
It’s simple – only use, and pay for, the accounting and finance resources you need, when you need them. Signature Analytics is a full-service accounting and finance firm, and we provide full teams to our clients at a fraction of the cost of full-time, internal staff. As a former business owner myself, I’d have bought our services immediately, and been that much better for it.
Of course, proof is in delivery. How do business owners deploy this model in their businesses?
Here are steps you can take to understand if fractional accounting is right for you. Since the model can also complement your existing accounting function, it is worth going through an analysis. A simple conversation could save you thousands a year, not to mention increase the value of your business. 1. Determine your needs and pain points. It’s vital to understand what you need to help your business grow. Accounting is at the foundation and requires diligence, accuracy, completeness, and timely input to be effective. Some key questions to ask:
Who does your accounting? Are they a CPA? Do they have an accounting degree from an accredited school?
Are you receiving the information you need to make the right decisions for your business? Financial planning and analysis is vital to help you determine choice A over B, and any significant allocations of working capital that affect cash flow need this due diligence.
Are you comfortable they have the expertise to properly record and account for all transactions that reflect the operations of your business?
What stresses you out as a business owner that you feel you’re not getting answers to? For example…
Are your monthly or quarterly Board meetings a slug fest, even though you believe you’re doing the right things to run the company?
Are you worried that you are paying too much in taxes, and you’re not sure how to plan effectively to minimize your tax exposure?
Have you been denied by banks to get a bank loan or increase existing lines of credit?
Are you concerned about where your cash is going and unsure how to forecast your cash flows?
Do you understand the gross profit of all your products and services?
Do you have a handle on your employees’ profitability and utilization, and do you understand their fully loaded cost?
Do you truly know your lines of business and their growth and profit potential?
And many more
2. Carefully consider your options. Oftentimes, small and medium businesses employ a CFO or an Office Manager/Controller combination to “take care of the books.” Either option has its advantages and disadvantages. The key is understanding the strengths and weaknesses of your accounting and finance function, and the advantages and disadvantages of keeping with the status quo. A fractional accounting model provides you the flexibility to adjust the mix of your accounting and finance team as your business needs change. That is crucial as your business grows and the level and complexity of your enterprise demands higher level oversight and analysis to achieve your goals.
Ultimately, the success or failure of your business starts at the top, which can be lonely at times, we know. Steering the ship demands passion, executive leadership, and the drive to be successful. It also requires top-notch financial data and analysis to make the right decisions. Fractional accounting is a way to get what the big companies have in spades at a fraction of the cost.
About Signature Analytics
Signature Analytics is an outsourced accounting firm providing ongoing accounting support and financial analysis to small and mid-size companies in stages ranging from innovative start-ups to well-established businesses. Our team of highly experienced accountants act as your entire accounting department (CFO to staff accountant), or complement your internal accounting staff, to provide the ongoing accounting support and financial analysis necessary to effectively run your company, analyze operations, and guide business decisions.
Author: Steven Conwell has more than 20 years of experience in strategy, operations, finance, accounting, sales, marketing, and corporate branding. He recently joined Signature Analytics as the Texas President for Dallas and Fort Worth Metroplex. Read his full biohere.
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CFO, VP of Finance, Controller, Accountant, Bookkeeper, Assistant, and Financial Analyst: these are often the titles you will encounter in an accounting and finance department. What are their responsibilities within a business and how do they help you grow? What is the value of an outsourced accounting and finance team?
Hiring Staff Time Consuming and Costly
Accounting transactions allow you to invoice and collect from customers, order and pay for goods and services, create paychecks, generate financial reports, and analyze business operations. In start-up organizations, these transactions are typically done by an administrative person who may or may not have accounting experience. Often, the bank statement is the most reliable and useful financial report – you’re either in the red, or (hopefully) the black.
As the business grows with more customers, suppliers, people and operations, the volume and complexity of transactions also increases. The ability to clearly see the health of the business becomes more difficult. This is often where a Bookkeeper would be added to the team. They may or may not have formal training, but they do understand the language of accounting transactions and how to get basic financial reports for tax, bank, and management purposes.
Accountants are usually added when more people are needed to process transactions. Accounts Receivable (A/R) and Accounts Payable (A/P), and Payroll are all areas where accountants or clerks with more specialized skills are necessary. Typically, there is a senior role to oversee the numerous functions and responsibilities. This may be where you start to hear the words “accrual,” “account reconciliations,” and “month end close process,” and you are likely outstripping your initial accounting system.
The next level will entail a Controller, which is when the full featured accounting department arrives. Controllers take on more extensive financial reporting and analysis, prepare basic budgets and forecasts, develop more robust internal controls and processes, and manage the outside accounting firm relationship. This is when you hear the words “GAAP,” “review,” “audit” and “compliance.” There are robust procedures in place to rely upon the numbers being reported, and analysis becomes a larger function overall.
Here is also where a Financial Analyst or VP of Finance can help offload some of the detailed business intelligence needs that may arise. These roles are often the first that comprise the finance team, requiring more interaction between lenders and investors due to increased complexity in the business model.
The final step is the addition of the CFO where the focus is to the future to strategize where the business is going and how best to maneuver the road map through goals and initiatives. The CFO focuses on strategic planning, interaction with the executive team, forecasting and projections, creating financial leverage, and accessing capital markets.
Consider Outsourced Financial & Accounting
If any of this is intimidating to think about as your business grows, consider relying on Signature Analytics to help you with ANY of these finance and accounting competencies. The benefit of relying on us is that you can pick and choose what you need, when you need it. You don’t have to go through the process of interviewing, hiring, and onboarding new staff.
Our talented, experienced accountants and financial analysts can complement your existing accounting employees, or act as your entire accounting department (CFO to staff accountant). We provide the ongoing accounting support and financial analysis necessary to more effectively run your company, analyze operations, and guide business decisions to help you grow. Contact us today.
https://signatureanalytics.com/wp-content/uploads/Accounting_Finance_Team-e1456170526710.jpg466700Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2016-02-22 11:42:212022-10-21 04:53:14Outsource or Hire an Accounting and Finance Team?
An article in the Journal of Accountancy references a new survey that states that “Small business leaders consider their accountants to be the most important professionals their businesses use.”
In addition, the article states that “Seventy-one percent of businesses represented in the survey outsource tax preparation, and half outsource payroll.” Among being more reactive than proactive, other accounting challenges include:
Accounts receivable/collections
Cash flow
Managing paperwork
Closing the books each month
Managing payroll
A common misconception in accounting is that a company’s tax CPA will also manage and provide support to the internal accounting functions of of the business. Add this to the list above, and it is clear that these challenges are not being addressed.
At Signature Analytics, we are proactive with our clients by streamlining their accounting processes to produce timely and accurate financial statements. This includes the day-to-day activities like invoicing and payables, the monthly close process, as well as forward-looking analysis such as cash flow.
Once these processes are established our CFOs focus on the strategic, financial analysis aspects of the business, like measurable metrics that drive profitability. The combination of these efforts help our clients move from a reactive state-of-mind to a proactive way to run their business.
We Can Help
If you need assistance in running your accounting and financials in a more proactive manner, contact us today. Our CFO consulting team is locally based and nationally focused. We can help you with this effort as well as other accounting and financial analysis needs of your business.
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Whether you are a new business owner or one that’s been in business for years, understanding requirements of a fiscal year close can be confusing. Keeping your financial information and records accurate year-round is critical to the success of your business, and it makes things that much easier during fiscal close.
Here are the top 5 questions you should ask, as you approach the process of closing your 2015 books:
Have you recorded all your revenue for 2015?
Do you have organized processes to record expenses in a timely manner?
Does your accounting function have oversight, checks and balances to ensure your books are accurate on a monthly basis?
Have you contacted your tax professional to schedule a meeting? Definitely try to avoid the March 15th and April 15th rush!
Did you make quarterly estimated tax payments throughout 2015? If not, you should ask your tax professional if this is an option in 2016.
We Can Help
If you need assistance with your fiscal year end close, contact us today. Our outsourced accounting teams are locally based and nationally focused. We can help you with this effort, as well as other accounting and financial analysis needs of your business.
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This article is a guest post, written by Unleashed Software. Unleashed’s online inventory software helps businesses better manage their inventory.
Effective and efficient inventory management is crucial to the profitable running of any inventory-based business, which is why you should know your company’s inventory turnover ratio. With this in mind, there is one simple accounting formula that inventory-based enterprises use to calculate just how well they are controlling the flow of inventory through their supply chain.
In short, the inventory turnover ratio allows a business to calculate the rate at which it acquires and resells goods to its customers. This allows a business the ability to clearly assess how well it is performing and whether it needs to either buy in more inventory or cut back on purchasing.
Because the two extremes of poorly managed inventory – overstocking and stockouts – place considerable burden on the bottom line of a business, it is crucial that an in depth appreciation of the rate at which inventory is being turned over is gained.
Armed with this financial information, operations managers are much better able to address costly build ups of stagnant stock in storage as well as forecast and purchase in-demand stock to meet customer service targets.
How the Inventory Turnover Ratio is Calculated
The most basic formula for calculating your business’ turnover ratio (i.e., the of times inventory is turned over within a given period) is to divide net sales by inventory.
Turnover Ratio = (Net Sales) / (Inventory)
The net sales figure is taken directly from the Income Statement of the company and the inventory number from the Balance Sheet.
So, for example, if a business’ annual net sales as recorded on its Income Statement is $2,000,000 USD and its inventory as recorded on the Balance Sheet is $200,000 USD, the turnover ratio (the amount of times within a year that it purchases and sells off its inventory) will be $2,000,000/$200,000 = 10 times.
A High Rate of Inventory Turnover
A company’s performance is directly linked to how well it manages its inventory. Typically, a business that boasts a high rate of inventory turnover can rest assured that it is managing the flow of inventory through its business proactively and profitably.
Generally, less inventory on the shelves results in less risk as a result of damages and obsolescence, as well as greater protection against fluctuations in market prices. If a business is stuck holding on to a surplus of unnecessary inventory and the market suddenly dips along with the retail price of those goods, then significant losses can be sustained.
The one potential red flag raised by a notably high inventory turnover rate is the risk of running into a stock-out situation. This is where a business does not have enough stock on hand to meet sudden surges in demand. This then leads to loss as a result of missed sales, customer dissatisfaction and even lost customer allegiance.
A Low Rate of Inventory Turnover
If inventory is turning over at a sluggish pace, then a business is not maximizing its ROI (return on investment). Low turnover rates are symptomatic of a business that is overstocking inventory and therefore wastefully limiting its available cash flow.
Worse still, is that a business that is unable to move its inventory efficiently automatically puts itself at risk to sudden market changes which could adversely affect the retail price of the goods it holds.
This will leave little choice but to either sell off at cost or liquidate stock at a loss. Either way, a low inventory turnover means that inventory is being managed poorly or sales are low. Both scenarios are bad news for business.
Effective inventory management software will help a business gain a sound appreciation of its inventory turnover rate. This is the first step in being able to address the issues that arise from carrying either too much or too little inventory.
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Profitability is an essential ingredient to the long term viability of a business; however, there is more than one way to look at profitability. We often ask business owners not just about the profit of their business, but the profit within the business.
Profitability is often the universal scorecard for the periodic success of any business. It is the answer to “How much money did we make this month/year?” However, what is often overlooked is the components of that profitability. A deeper understanding can not only lead to improved overall results, but also allow a business owner to have more confidence in decision making and enhance the quality of budgets and projections.
There are three primary categories of profitability within a business:
Profitability by Employee (most common in service-based businesses)
Profitability by Product or Service
Profitability by Customer
Of course, the components are different depending on the type of business and there can be analyses of profitability by business segment as well.
Below we will walk through each in more detail and also provide a few examples.
Determining Profitability by Employee
Let’s use the example of a service business, perhaps a marketing agency that generates revenue by billing hourly work performed by its staff. It would be of value to the business owner to know the profitability of its employees.
If reviewing monthly, we would calculate the revenue generated from billings related to that employee, and then apply that against the costs related to the employee. That cost would include salary, but also bonuses, workers compensation, insurance and payroll taxes, as those are all direct costs related to the employee. Using that information, a matrix can be created to show the profitability of each employee within the company.
So let’s say two employees that perform largely the same function are generating much different profitability on a monthly basis. What could cause that? Well, there could be multiple answers, but below are the two most common:
Employee utilization. Utilization refers to how much time that employee is billing the clients relative to the total amount of hours in a month. If one employee is billable 60% of the time, and another is billable 85% of the time, profitability could vary significantly between the two employees. Analyzing utilization rates by employee will help a business owner determine the optimal utilization rate for each staff position.
Mismatch of bill rate to pay. The variation in profitability may be because the company is paying an employee too much relative to the bill rate they are charging to the customer.
Many companies produce or distribute more than one type of product or service. For example, a manufacturing company may produce three different products lines. In those situations, it is essential to understand the profitability of each individual product line—not just overall company revenue.
To do this, we take the price charged to the customer for each product and deduct the costs attributed to creating that product. Those costs should include raw materials, personnel, packaging, etc. However, it is not always possible to determine unique costs, such as freight, labor, and the cost of using machinery. In those cases, allocations have to be used. For example, if Widget A takes 6 hours to be manufactured and Widget B takes 2 hours to be manufactured, and employees work 8 hour shifts, we could apply 75% of that employee’s labor cost to Widget A and 25% to Widget B.
Profitability by product or service can be particularly eye opening for a business. Let’s assume a business had three product lines and was selling what it thought was high quantities of each. That business could even be profitable as a whole. But consider if one of those three products was actually losing money. The business could potentially forfeit a significant portion of sales and still generate more to the bottom line. Now, there are times when one product is sold as a loss leader to aid in the sales of other products. That can be a great strategy, but the business owner should know profitability by product or service to best determine the right sales mix for the business.
Case Study: How a profit margin analysis enabled a rapidly growing brewery to increase their overall margins and profits by 15%.
Determining Profitability by Customer
For any business that sells products and services, an evaluation of profitability by customer can be performed. We would perform an analysis of the revenue generated for each customer and then deduct from that all costs directly attributed to providing products and services to that customer. That could include labor, materials, shipping, travel, and anything else that was directly tied to that particular sale.
The results of this analysis are often surprising as many businesses actually lose money on some customers. This goes to the misguided notion that any sale is a good sale. By ceasing to work with certain customers, companies can actually improve overall profitability. At a minimum, it invites a discussion around pricing for products and services provided and/or a deeper look at costs required to produce those products and services. For example, if a business is running very lean from a cost standpoint, it simply may have to charge more for its products to some, if not all, of its customers.
There is often an opportunity in costs as well. Especially in businesses with material competition, the ability to change prices can be limited, which makes cost control even more important. Is the labor force working at capacity? Can materials be purchased cheaper from suppliers? How significant are shipping costs to the business? Those are all questions at the heart of cost control in an effort to improve margins in the business.
Putting this kind of information in the hands of the business owner, operations team and the sales force can be instrumental in creating a better pricing strategy, sales mix and cost management that can lead to an improved bottom line. These tools could be a major catalyst for long-term success, and should be in the tool-box of every business owner. Contact us today to learn more or to schedule a free consultation.
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It’s Your Money and Your Life is a talk radio show on 760AM KMFB San Diego. On the show, Richard Muscio and co-host Joe Vecchio feature notable guests providing valuable information on financial and business matters as well as issues about your life, your leisure and your legacy.
On July 22, 2015, Richard and Joe interviewed the President of our San Diego office, Jason Kruger. In the audio below, you can hear Jason discuss Signature Analytics and the ways we support growing business by acting as their accounting and finance department. A few of the topics discussed include: how the cloud has changed accounting, ways to maximize the value of your company in preparation for an acquisition or liquidity event, the importance of internal accounting controls, avoiding overpayment of taxes, and much more.
Listen to the Interview
Listen to more It’s Your Money and Your Life podcasts commercial-free at www.iymoney.com.
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https://signatureanalytics.com/wp-content/uploads/header-large-logo.png280775Jorge Pireshttps://signatureanalytics.com/wp-content/uploads/Signature-Analytics-Logo-Blue-Darker-Grey-Horizontal-Main.pngJorge Pires2015-07-27 09:21:102022-11-04 19:16:40Listen to our President Jason Kruger on San Diego’s 760AM Radio Show “It’s Your Money and Your Life”
QuickBooks is by far the most popular accounting software used by small and mid-size businesses and deservedly so as it has more than enough product options for most any type of business. It is also the most commonly used accounting software amongst our clients; however, as the massive shift to cloud-based business applications continues, many of our clients have been moving from the desktop version of QuickBooks to QuickBooks Online.
If you are considering moving from QuickBooks Desktop to the online version, below are some benefits and drawbacks of each to help you decide which version of the accounting software is best for your business.
Why QuickBooks Desktop?
The desktop version is a very robust product that can handle even the most complex accounting situations.
Benefits:
Vast array of accounting functions
Multiple entry screens and reports can be open at one time
Lots of different financial reports can be run
Inventory tracking and job costing related functions good for manufacturing companies
Drawbacks:
Can appear overcomplicated
Have to manually backup your file, risk loss of data if your computer crashes
Banking and credit card information has to be manually pulled into the system
Why QuickBooks Online?
QuickBooks Online strives for simplicity without compromising accounting functionality.
Benefits:
Always online, no lost data, no backups
Can have multiple users in the system at any time
Ability to setup an accountant for access
Auto-link bank and credit cards to push information into company file
Monthly subscription model, always updated to the latest version
Ease of access from laptops, tablets and even smartphones
Drawbacks:
Limited reports
Slow internet connections will slow entry and accounting
Each report or input screen you have running requires an additional browser tab
Making the Switch to QuickBooks Online
Cloud-based applications are the wave of the future and 9 times out of 10 the accounting and financial features of the QuickBooks Online platform will be more than enough to support the accounting function of your company.
If you’re considering moving away from your on-premise accounting system to a cloud-based accounting software such as QuickBooks Online, we can help. We have helped several clients make the transition and it’s actually simpler than you may think. Contact us today for a free consultation.
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CNBC’s hit show, The Profit, provides viewers with a glimpse into some of the difficulties faced by business owners as successful investor, Marcus Lemonis, steps in to help them grow or rehabilitate their struggling businesses.
On the show, Marcus approaches each business with the same concept: Business success is about the three P’s: People, Process and Product. If a business has the right people, operates the business using the right processes, and has a strong product, then it has positioned itself to be successful.
While his concept is meant to assess a business as a whole, it can also be used to evaluate other aspects of a business as well, including its accounting.
With the New Year underway, now is an excellent time to evaluate the accounting and finance function of your business and using Marcus’ “People, Process, and Product” concept could help.
People
Without the right accountants, a business runs the risk that transactions are not posted timely or accurately and therefore do not produce reliable information upon which to make decisions. For that reason, it is important to have a strong accounting team; however, it is also important to ensure that those qualified accountants are being properly utilized.
In some cases, a business may employ a strong, experienced accountant and feel that their accounting department is in good hands; however, if that individual is tasked with performing basic accounting entries, as well as the more complex analysis, the business may be paying too much for the more basic processes which could be done by someone with less experience.
Alternatively, companies may have a strong staff accountant or bookkeeper who can perform most of the basic accounting processes; however, they may not be able (or qualified) to provide key financial analyses the executive team requires to analyze operations and guide business decisions.
Process
One common issue with the businesses appearing on The Profit is their lack of accurate financial statements which Marcus uses to evaluate the business and identify any concerns. To ensure financial statements are maintained correctly, the accounting department needs to establish the appropriate processes (daily, weekly, monthly, and annually). At a minimum the accounting department should be able to close the monthly financial statements within 15 days after month end so they are relevant for executives.
Aside from the typical close process, there are also processes that need to be established relating to approving bills, making cash payments, issuing invoices, and reimbursing employees for expenses, among others. Proper approvals and oversight are critical in these processes as businesses are at risk to errors and potential employee fraud without them – regardless how large or small the organization is.
Product
Within the accounting department, the “Products” include monthly financial statements, board/management reports, cash flow projections, and any other financial reporting or analyses used by others. Without these products from the accounting and finance departments, the executive team will not have visibility into the performance of the operations or be able to make critical decisions.
Evaluating Your Accounting Function Using the 3 P’s
Entrepreneurs and executives should periodically re-evaluate their company’s accounting and finance function (at least annually) confirming their accounting People, Processes and Products are appropriate to help manage the business.
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In case you missed them, below is a round-up of our most read blog posts of 2014.
#1Employee Fraud is More Common in Small Businesses – Are you Protected?
Small organizations (those with less than 100 employees) continue to be the most common victims of organizational fraud reporting 28.8% of all fraud instances in 2014. In this post, learn why small businesses are at an increased risk and the 7 things small business owners can do to protect their company. Read this post →
#2Analyzing Employee Utilization Rates to Drive Profitability
Knowing where and how employees are spending their time enables professional services firms to appropriately set their rates, properly asses how much to invoice clients, and determine if they are over or understaffed. Therefore, it is imperative for all professional services firms to analyze employee utilization. In this post we explain how utilization summary reports and if-then analyses will enable you to analyze utilization rates and make key strategic decisions that drive profitability. Read this post →
#3Preparing for an Annual Audit: Eliminate the Pain and Overage Fees
If your company is looking for financing from investors or financial institutions, considering a potential acquisition, or foresees an IPO within the next 3 years, you may need to have an annual financial statement review or audit. If you’re not prepared, the process can be an expensive undertaking, both in employee time and company money. It does not have to be though! This post identifies ways to eliminate the pain and overage fees from the annual audit process. Read this post →
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So you have decided to sell your business, and you’ve received your first letter of intent from a potential buyer, exciting! Now, it’s time to prepare for what many view as a terrifyingly brutal process – due diligence.
There are several types of due diligence, including legal, financial, tax, operational, IT, human resources, commercial, and more. In this post, we will focus on financial due diligence as it’s one of the most commonly executed forms.
Initial Requests
The due diligence process typically begins with an overwhelming list of requests which are expected to be provided in a short period of time. This timeframe is usually due to the time limitations of the letter of intent.
Financial information is typically requested for the year-to-date and the previous two fiscal years. If the due diligence team uses the term “TTM,” they are referring to financial records for the 12 month period (or Trailing 12 Months) which ends with the more recent month.
Once the monthly trial balances are provided, there will likely be requests for schedules, such as ones that relate to customer revenues and costs. Once those are submitted, they should agree with the trial balances.
Each balance sheet account typically includes numerous requests for supporting documents to prove the accuracy of the balance throughout the period. Preparing these just before the due diligence process can be very time-consuming and can distract management from the day-to-day operations of the business.
Once all of the requests have been prepared, they are then stored on an electronic drive known as a virtual data room (VDR).
On-Site Visit and Meetings with Management
Once the data has been provided, the due diligence team will schedule a visit to your facility or offices. These meetings with management often take multiple days to cover all of the questions and clarifications needed.
Typically, meeting agendas could include:
Overview of the business operations.
Tour of the facility and introductions to key members of management.
Discussion regarding customer base, types of agreements, fluctuations of revenue by customer, revenue recognition, attrition of customers, and concentration of customers.
A walkthrough of the entire trial balance. Questions may be asked on fluctuations of the balances on certain accounts, breakdown of items within accounts, and justification for the accounting method used.
Throughout this process, the due diligence team is attempting to identify any unusual or non-recurring items, and any transactions that may not have been recorded or occurred but are expected to be incurred in the future.
Understanding of inventory and accounting methods.
Understanding any trends in pricing or future expectations for pricing.
Determining whether all liabilities have been properly recorded.
Understanding headcount, payroll expenses, and other benefits employees currently receive, as well as committed employee contracts that may include acquisition-related bonuses.
And many other topics – so be prepared!
The on-site process can be grueling for a company. The due diligence team usually requires the attention of the more senior or experienced employees, the ones who are integral to keeping the company’s operations running. Part of the preparation process will be helping these individuals on what to expect. If your management team can answer all the due diligence questions thoroughly and clearly, doing so will avoid multiple follow-up questions. This type of preparation allows them the ability to continue focusing on their daily tasks.
Final Report and Negotiation
When the due diligence team concludes their visit to your facility, the expectation is that they will review all of the information provided in detail and communicate any additional inquiries. Then, they will complete their report and submit it to the buyer. It is up to the buyer to use the results as a negotiation tool when determining the purchase price or other key terms in the purchase agreement.
The Risk of Not Being Prepared
By now, it should be evident that being adequately prepared for the financial due diligence process is critical to the completion of a successful acquisition.
Business owners who become distracted by the number of financial requests can lose sight of the negotiation process, and therefore not receive the greatest value possible for their business.
If the financial information is considered disorganized, not accounted for properly, or not supportable, the buyer could assume that the results provided may not be an accurate depiction of the business. The buyer could view this as an additional risk and discount the potential purchase price as a result.
Prepare Your Business for the Financial Due Diligence Process
Signature Analytics has supported several companies through the acquisition and financial due diligence process. Our team can ensure your financial records are accurate and organized before the start of the due diligence process. Our experts can help prepare supporting schedules and documentation that may be requested by the due diligence team. We can gather and arrange a sell-side due diligence or quality of earnings report, so you’re fully prepared for the financial due diligence process.
Don’t go through the financial due diligence process underprepared or alone, contact us for more information or a free consultation.
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“Don’t buy a Fiat 500e electric car” says the company’s chief executive, Sergio Marchionne. According to Mr. Marchionne, it has nothing to do with the quality and price of the car, but rather the cost associated with producing the car – specifically the battery – and its impact on the product’s profit margin. The chief executive admitted at a recent appearance, “I hope you don’t buy it because every time I sell one it costs me $14,000.”
As a business owner, it is easy to see if you are profitable, just take a look at your company’s net income; however, that number alone does not provide a complete picture. Fiat is a perfect example. Overall, the company is profitable; however, when you look at the profit margins for their individual products, they are actually losing money on one of their product offerings.
For a more accurate measure of how your company is doing, it is imperative to calculate your profit margins by product line.
Calculating Profit Margins
Profit margin is an accounting measure designed to calculate your profit as a percentage of sales. It can be used to evaluate your business as a whole or for each individual product line.
Why is this useful? The two main reasons are 1) to compare your profit margins on a monthly and/or yearly basis and 2) to establish your position against other companies in your industry.
To calculate gross profit margin, divide your gross profit, which is sales minus cost of goods sold, by sales.
Analyzing Profit Margins by Product Line to Increase Profitability
Let’s assume your company has $10,000 in sales for the month and your gross profit for that same month is $5,000. That would mean your company’s gross profit margin is 50%.
Some business owners may see these numbers and think “we’re doing great” and they might be; however, by taking a closer look at the company’s profit margins by individual product line, they may be able to identify opportunities to increase profitability even more.
Using the same example above, let’s assume that Product A generated $7,000 in sales for the month and had a gross profit of $3,000. Product B generated $3,000 in sales and had a gross profit of $2,000. In this example, the gross profit margin for Product A would be 42.9% and for Product B would be 66.7%.
Using this information, a company could consider adjusting their pricing and distribution strategies to increase their overall profits. One way to achieve this would be to increase the price or reduce the cost of goods sold for Product A to improve the gross profit margins for that product line. Alternatively, the company could adjust their promotional efforts to focus more on selling Product B since the margins are greater.
Referring back to the Fiat example, the company is unable to increase the price for their electric vehicle because the market will not bear it. They should eventually be able to reduce the manufacturing costs of the car battery, but that will take time. So for now, it seems that Fiat is taking the alternate approach and focusing their promotional efforts on their other product lines.
Improve Your Company’s Profitability
At Signature Analytics, we work with our clients’ management teams to properly identify and understand the profit margins of their business. This is accomplished by producing a detailed understanding of the cost structure and related sales price associated with each product line and revenue stream of the company. This profit analysis can also be shared with company investors and banking relationships to enhance investor relations and participation.
In addition to profit margin analysis, we can provide accurate forecasts and budgets that enable our clients to properly project EBITDA growth and allow for better cash management strategies. All of these accounting and financial reports – profit margin analysis, forecasts, and budgets – empower our clients with the financial information they need to make informed business decisions that help to increase overall margins and improve profitability.
Want to learn more about all the ways Signature Analytics can help improve your company’s profitability? Contact us for a free consultation.
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