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. 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.
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. 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 due 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. 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.
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%. 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.
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. This is often handled by a bookkeeper or, in some cases, the business owner. 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.
Leveraging Technology in Accounting
The Role of AI 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. 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.
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.
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. 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.
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. 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 has several small business owners who rely on them as their outsourced CFO. These businesses range in size ($1M to $15M in sales) and industries. We are an expert in servicing small businesses because we have been entrepreneurs. Our expertise doesn’t just come from theory, it comes from practice.
Contact us now if you want to learn what a CFO can do for your small business. We’d love to see if we are a good fit and can help you accomplish your goals.