In the early 2000s, Marvel Comics was facing a financial crisis. The company, now known for its blockbuster superhero movies, was struggling with massive debt and had even filed for bankruptcy in 1996. Despite having popular comic book characters, Marvel’s financial mismanagement and lack of strategic oversight had brought it to the brink of collapse.
It wasn’t until they hired new leadership with strong financial acumen and overhauled their financial department that Marvel began to turn things around. They restructured their finances, diversified their revenue streams, and focused on their core strengths. The financially driven strategies laid the foundation for Marvel’s resurgence, leading to the creation of the Marvel Cinematic Universe, which has become a multi-billion-dollar franchise. Unfortunately for small business owners, they don’t have the same resources as Marvel. Many small business owners often prefer focusing on revenue generation rather than accounting tasks. However, with the right sort of leadership, small business owners can gain the same benefits as Marvel did with having a strong financial and accounting function.
The world of accounting has been evolving rapidly, particularly for small businesses. Over the past two decades, we’ve seen a significant reduction in the number of qualified accounting professionals available to assist small businesses. Fortune 1000 companies and public accounting businesses often absorb these resources, leaving small businesses struggling to find affordable and reliable accounting help. This challenge has prompted many small businesses to explore alternative solutions like outsourced CFO services and offshoring. In this article, we’ll discuss several options for your accounting needs.
Understanding Small Business Accounting
Defining Small Business Accounting Needs
Small businesses often have limited internal resources dedicated to accounting. Most small businesses operate with zero to one internal accounting professional, even when their revenues are in the millions. This lean setup makes it challenging to maintain a robust accounting function internally. Even more concerning, the lean setup often leaves a void at the top, where larger businesses fill with a CFO. A strong accounting foundation is critical to managing cash flow, maximizing profit margins, and ensuring business longevity. Effective small business bookkeeping is essential to manage these financial aspects efficiently.
Why Small Businesses Struggle with Accounting
The shortage of skilled bookkeepers and accountants is only part of the problem. Small businesses also face skyrocketing costs when hiring or retaining accounting talent. As larger firms offer more competitive salaries, small businesses must find innovative ways to manage their financial functions effectively.
Several business owners try to operate as their bookkeeper and CFO. Understanding basic accounting terms is crucial for these owners to maintain organized financial records and implement best practices. As Gino Wickman detailed in his book Traction, you must get the right people in the right seats to have sustained success. Business owners are often key to the operations and sales of the business. They are often not trained in finances and accounting and are often better utilized elsewhere in the business.
The Importance of Accurate Accounting
Preventing Business Failure Through Proper Cash Flow Management
One of the most common reasons businesses fail is poor cash flow management. In fact, 82% of businesses that fail do so because of cash flow problems. Proper accounting practices help small businesses track their cash flow, ensuring they have enough liquidity to cover expenses and invest in growth. Regularly recording transactions is crucial to maintaining accurate financial records. Outsourcing your accounting needs can provide the expertise required to manage cash flow effectively.
Higher Profit Margins with Better Financial Management
Businesses with robust financial management practices tend to achieve higher profit margins—on average, 20% higher than their peers. By leveraging accurate financial data, small businesses can make informed decisions that optimize costs and improve efficiency. Maintaining accurate records is essential for timely invoicing, tracking customer payment behaviors, and informing tax obligations.
Enhancing Access to Financing
How Strong Accounting Practices Improve Financing Opportunities
Securing financing is often a challenge for small businesses. However, businesses with strong accounting functions are more likely to obtain financing at competitive rates. Good financial practices can improve access to capital by up to 7% and reduce interest rates by up to 5%. Efficient management of accounts receivable is crucial for maintaining financial health and can significantly impact a company’s ability to sustain operations. Having an outsourced CFO ensures your financial statements are accurate and well-prepared, which can make a significant difference when applying for loans.
Increasing Business Valuation Through Solid Financial Controls
Many business owners plan to sell their businesses at some point. Having strong financial controls and systems in place can increase the value of your business by up to 25%. Without these, a business might not be sellable at all. Buyers want to trust the financial statements, and an outsourced CFO can help ensure that your books are in order. Properly managing unpaid bills is essential for understanding a company’s financial obligations and maintaining healthy cash flow.
The Three Pillars of Accounting: Transactional, Reporting, and Strategy
Building a Strong Accounting Foundation
A strong accounting function is built on three pillars: transactional, reporting, and strategy. Properly recording transactional data, such as vendor invoices, payments, customer invoices, and payroll, is fundamental. Data entry plays a crucial role in ensuring these records are accurate and up-to-date. This is often handled by a bookkeeper or, in some cases, the business owner. Utilizing a digital spreadsheet can further enhance the efficiency and accuracy of recording these transactions. However, inconsistency in these processes can lead to unreliable financial data.
The Importance of Accurate Financial Reporting
Once transactions are recorded accurately, the next step is reporting. Financial reports, like balance sheets and income statements, provide insights into the business’s financial health. For these reports to be useful, the underlying transactions must be correctly recorded. Outsourced CFO services can ensure that your financial reporting is consistent and accurate, providing a clear picture of your business’s performance.
Developing a Strategic Financial Plan
The final pillar is strategy. Without accurate reports, developing a sound strategy is nearly impossible. A strong financial function allows for forecasting, trend analysis, and strategic adjustments that help businesses operate efficiently. Yet, only about 10% of small businesses have a strategic financial plan. Outsourced CFOs can help develop these plans, setting your business up for success.
Financial Statements
Financial statements are the backbone of small business accounting, offering a clear picture of a company’s financial health. For small business owners, understanding these documents is crucial for making informed business decisions and steering their company towards financial success. Income statement discrepancies are a common issue that can lead to confusion without the proper understanding.
There are three main types of financial statements that every small business owner should be familiar with:
- Balance Sheet: This statement provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time. It helps business owners understand what the company owns and owes, offering a clear view of its financial position.
- Income Statement: Also known as a profit and loss statement, this document summarizes a company’s revenues and expenses over a specific period. It shows whether the business is making a profit or incurring a loss, which is essential for evaluating operational performance.
- Cash Flow Statement: This statement tracks the inflows and outflows of cash and cash equivalents over a specific period. It helps business owners manage cash flow, ensuring they have enough liquidity to cover expenses and invest in growth.
Financial statements are not just for internal use; they are also critical for external stakeholders. Investors, lenders, and other stakeholders rely on these documents to assess a company’s creditworthiness and growth potential. Regularly reviewing financial statements allows small business owners to identify areas for improvement and adjust their business strategy accordingly.
Using accounting software can simplify the process of generating financial statements and tracking financial transactions. These tools provide accurate and timely financial data, enabling business owners to make informed decisions and maintain a clear view of their company’s financial health.
In summary, financial statements are a vital component of small business accounting. They provide valuable insights into a company’s financial performance, helping business owners achieve financial success and make strategic business decisions.
Choosing an Accounting System
Choosing the right accounting system is a critical decision for small business owners. With numerous options available, it’s essential to select a system that meets your company’s specific needs and requirements.
There are two main types of accounting systems: cloud-based accounting software and traditional desktop accounting software. Each has its advantages, and the best choice depends on your business’s unique circumstances.
Cloud-Based Accounting Software: This option is increasingly popular among small business owners due to its scalability, flexibility, and accessibility. Cloud-based systems allow you to access your financial data from anywhere, making it easier to manage your business on the go. They also offer automatic updates and backups, ensuring your data is secure and up-to-date.
Traditional Desktop Accounting Software: While less flexible than cloud-based options, desktop software can be a good fit for businesses that prefer to keep their financial data in-house. These systems often provide robust features and can be a cost-effective solution for businesses with limited internet access. Quick note – I do mostly steer my clients away from desktop software. Unless there is a compelling, industry-specific reason to have a desktop-based system, cloud software is the way to go.
Accounting System Considerations
When choosing an accounting system, consider the following factors:
- Number of Users: Ensure the system can accommodate the number of users who need access to the financial data.
- Type of Business: Different industries have unique accounting needs. Choose a system that offers features tailored to your specific industry.
- Level of Complexity: Select a system that matches the complexity of your business’s financial transactions and reporting requirements.
- Cost: Consider the cost of the accounting system, including any monthly or annual fees. Ensure it fits within your budget.
- Support and Training: Look for a system that offers comprehensive support and training to help you and your team use the software effectively.
- User-Friendliness: Choose a system that is easy to navigate, even for those with limited accounting experience.
- Security and Reliability: Ensure the system provides robust security features, including data backup and disaster recovery.
By choosing the right accounting system, small business owners can streamline their accounting processes, reduce errors, and improve financial reporting. This decision can significantly impact your business’s financial management, reducing stress and helping you achieve your business goals.
Leveraging Technology in Accounting
Artificial Intelligence (AI) is becoming increasingly prevalent in the accounting world. However, business owners should be cautious about relying solely on AI tools for decision-making. While AI can help with repetitive tasks, like categorizing transactions in QuickBooks, it lacks the contextual understanding needed for nuanced financial decisions. Digital bookkeeping offers a modern and efficient alternative, providing speed, accuracy, and integration with other software, which enhances overall efficiency and accuracy in financial management. An outsourced CFO can provide the human insight that AI currently cannot.
Combining AI with Human Expertise
AI-powered analytics tools are excellent for repetitive processes but may not be as reliable for strategic financial planning. Using these tools alongside human expertise, such as that provided by an outsourced CFO, can enhance your financial management practices. QuickBooks Online plays a crucial role in this integration, offering a robust platform for both AI and human experts to collaborate effectively.
Compliance with Accounting Regulations
Compliance with accounting regulations is essential for small business owners to avoid penalties, fines, and reputational damage. Adhering to these regulations ensures accurate financial reporting and helps maintain the trust of stakeholders.
Small business owners must comply with various accounting regulations, including tax laws, financial reporting requirements, and accounting standards. The most common accounting regulations for small businesses include the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). These standards provide guidelines for financial reporting, ensuring consistency and transparency.
In addition to GAAP and IFRS, small business owners must comply with tax regulations, including income tax, payroll tax, and sales tax. Failure to adhere to these regulations can result in significant penalties and legal issues.
Accounting software can be a valuable tool in ensuring compliance with accounting regulations. These systems provide automated accounting processes and financial reporting, reducing the risk of errors and ensuring that your financial data is accurate and up-to-date.
It’s also important for small business owners to establish and follow their company’s accounting policies and procedures. Regular audits and reviews can help identify areas for improvement and ensure compliance with accounting regulations. Implementing strong internal controls, such as segregation of duties and authorization procedures, can further enhance compliance and reduce the risk of fraud.
By complying with accounting regulations, small business owners can improve their financial reporting, reduce errors, and avoid penalties. This not only enhances the company’s reputation but also reduces risk and helps achieve business goals.
The Benefits of Outsourcing Your CFO Needs
Why an Outsourced CFO is the Gold Standard
For small businesses, a specialized outsourced CFO can provide immense value. They can implement systems and procedures for transactional work and reporting, support internal staff who may not be formally trained in accounting, and provide strategic insights that drive business growth. Additionally, hiring a certified public accountant (CPA) ensures that your financial management is handled by a professional with advanced credentials and skills, enhancing accuracy and efficiency.
All-in-One Accounting Services
All-in-one services like Pilot and Bench offer comprehensive solutions that cover all aspects of accounting. These services can be a good fit for businesses looking for a one-size-fits-all solution, though they may lack the personalized attention provided by an outsourced CFO.
Training Non-Accounting Staff for Transactional Work
Utilizing Non-Accounting Staff for Basic Tasks
Many bookkeeping tasks, such as invoicing and coding transactions in QuickBooks, do not require a trained accountant. However, recording transactions accurately is crucial for maintaining reliable financial records. With the right training from an outsourced CFO, your existing staff can handle these tasks effectively, reducing the need for a dedicated bookkeeper.
The Role of Standard Operating Procedures
Having standard operating procedures (SOPs) in place can make training non-accounting staff more manageable. These SOPs provide clear instructions on how to handle various accounting tasks, ensuring consistency and accuracy.
The Future of Small Business Accounting
The Shift Towards Outsourcing
The accounting industry is evolving, and small businesses must adapt to these changes. Outsourcing your accounting needs to a specialized CFO can provide the expertise and resources needed to navigate this new landscape. With the right support, small businesses can thrive and grow, even in a challenging economic environment.
Preparing for the Future
To prepare for the future, small businesses should consider their accounting needs carefully. By outsourcing your CFO functions, you can focus on what you do best—running your business—while leaving the financial complexities to the experts. Establishing a sound financial strategy is crucial for maintaining cash flow and achieving long-term success.
Conclusion
Small businesses face unique challenges when it comes to accounting and finance. However, by leveraging outsourced CFO services, businesses can overcome these challenges and position themselves for long-term success. From managing cash flow to securing financing and improving profitability, an outsourced CFO can provide the expertise needed to drive growth. Making informed choices is a crucial business decision that can significantly impact your financial health. If you’re looking to take your small business to the next level, consider outsourcing your accounting needs today.
Krieger Analytics Can Help
Krieger Analytics is a trusted partner for small business owners who need help with accounting, bookkeeping, and financial management. Our team of experts has years of experience in providing accounting services to small businesses, including financial statement preparation, budgeting, and cash flow management.
We use the latest accounting software and technology to provide efficient and effective accounting solutions. Our services include financial statement preparation, budgeting, cash flow management, and compliance with accounting regulations. We also provide training and support to help small business owners improve their accounting skills and use accounting software effectively.
Our goal is to help small business owners achieve their financial goals and improve their overall financial health. We offer a range of services, including accounting, bookkeeping, and financial management, to help small business owners succeed. Our team is dedicated to providing excellent customer service and building long-term relationships with our clients.
By partnering with Krieger Analytics, small business owners can improve their financial health, reduce stress, and achieve their business goals. Let us help you navigate the complexities of accounting and set your business up for long-term success by providing valuable insights from Spotify’s success.
