We live in a world where every dollar counts. Small business owners grapple with the dilemma of balancing cost-effective finance and accounting solutions with the need for more expertise. The key question is, how can you get the most out of your financial operations without breaking the bank?
This article will explore strategies to set up your accounting and finance departments. The goal is to accomplish this while maximizing efficiency and effectiveness, all for the cost of a single full-time employee (FTE). We’ll dive into three real-world scenarios from my clients, dissecting the costs and design of each approach. Whether you’re just starting or looking to optimize your existing systems, this article will help you navigate the financial framework that best suits your business’s unique needs.
Cost is No Longer an Excuse
Many small business owners set up unnecessary obstacles for their business by not getting the necessary accounting resources. Most think that higher-level accounting resources are unavailable because of cost and lack of full-time work. While that may have been the case in the past, it is no longer.
I have helped several of my clients set up their accounting and finance departments that satisfy all their requirements for little more than the cost of one mid-level full time accounting resource. Most of these businesses are between $1-$10M in revenue. These small businesses will tell you they never thought they could achieve this in a cost-effective way. Further, most will tell you that they now have more support and expertise than they had ever imagined.
Setting the State: Understanding Small Business Accounting Needs
A small business’s accounting needs are no different from those of a larger business. The difference, however, is scale.
I break the accounting and finance function into 3 areas:
- Day-to-Day Bookkeeping – This area includes payroll, accounts payable, invoicing, and accounts receivable tasks.
- Month-End Close – The basis for higher-level financial departments is solid numbers. Month-end close is a reconciliation of the financial statements and proper accounting for all transactions.
- Financial Expertise – Forecasting and budgeting can be accomplished once the month-end close is done. This level also includes projects such as lease and pricing analysis, investment and debt consulting, and several others.
As important as it is to identify the above roles, it is almost equally important to identify tasks that are not accounting functions. Several small business owners will ask their accountant or bookkeeper with HR, IT, and other back-office tasks. If an owner hopes to set up a team that can operate at a high level, they must separate non-accounting tasks.
Scenario #1: The Outsourced Accounting + CFO Approach
Perhaps the biggest success story with designing and implementing a full accounting department solution was with a $10M in revenue manufacturer. This client comfortably fits into an outsourced solution, even with $10M in revenue.
When I joined this client, they had just lost $1.5M in EBITDA over the past year and their accounting function was a mess. As we sit here a mere 14 months later, they have $600,000 in EBITDA and are spending over $80,000 less on their accounting team while getting significantly more. I wish I could take credit for the change, but the CEO wisely invested in getting better numbers, a more strict budgeting approach, and zeroed in on margins.
After 2-3 months of assessing needs and talking with stakeholders, we outsourced most of the day-to-day accounting function to a firm in the Philippines. This firm handles everything from billing clients to handling invoices.
This is a full-time resource. However, the cost is ~30% of a US resource for the same (or better in some cases) work product. Let me assure you, the rate we pay in the Philippines is well above the median local income. However, this was a solution we could use to get a similar skillset for less cost.
To handle the month-end responsibilities, I close the books by the 10th. I also handle all reporting, budgeting, and projects that come up.
This solution costs between $5,000 and $6,000 per month. For this price, the client has a bookkeeper, controller, and CFO-level talent for less than the cost of one full-time bookkeeper.
Scenario #2: Part-time Resources
The next client is a $4M service provider. This client has approximately 70 jobs a year for approximately $36,000 on average per job. They generate approximately 150 invoices and have 7 full-time employees.
Before working for this client, they had a resource they were paying $120,000 per year to handle their accounting function. Additionally, this resource provided no budgeting, forecasting, or financial expertise.
This client had nowhere near the transactional volume that the client in scenario #1 had. However, they required a more professional touch due to the high average ticket price.
I immediately connected this small business with a US-based controller-level resource. We designed a system where this resource would devote every Thursday to vendor invoices and payments, client billings, and other accounting tasks. Because we could get so process-oriented, we could limit these tasks to 4-8 hours per week. This resource also had the skill set to handle month-end close and ensure that the books were accurate each month.
Once that was complete, I would take over and handle the reporting, budgeting, and various financial analysis projects. In the first month, we dove into contract pricing and how to better achieve higher realization on such projects.
This solution costs between $4,500 and $5,500 per month. For this price, the client saved approximately $60,000 per year on their accounting function and get higher-quality resources.
Scenario #3: Blended Approach – Mix of In-House and Outsourced Services
I often tell clients that sometimes the accounting is so basic that someone akin to an administrative assistant can handle it with some training. That is the approach I applied at a $5M online retailer.
While the company had a system in place to handle all of the customer-level transactions, a significant amount of vendor invoices had to be handled. Also, payroll had to be handled on a bi-weekly basis.
We broke down the areas with heavy transaction volume, put a system in place to handle them, and adequately trained the assistant. Even though the assistant was handling the process, I was still in place as a resource for them.
To handle the month-end responsibilities, I close the books by the 10th. I handle all reporting, budgeting, and projects that come up. The client has unique cash flow reporting requirements, and we have an in-depth system to monitor and adjust margins.
This solution costs between $6,000 and $7,000 per month. For this price, the client has a controllable resource to monitor bookkeeping along with a higher-end resource to consult with.
The Importance of SOPs
In all cases above, we developed strict standard operating procedures. We would document these procedures and often provide a video to support training.
All small businesses are susceptible to unforeseen change. This isn’t unique to the accounting function. However, to safeguard against this, we created the ability to ramp up a secondary resource quickly. This ability is critical to making sure that there is an adequate backup plan.
There are several resources on how to develop great SOPs. I won’t go into too many details here. But while coming up with your accounting department plan, make sure you consider SOPs.
Evaluating the Turning Point: When to Invest in Full-Time Resources
As I mentioned, most small business owners mistakenly believe there is a revenue dollar amount where their business will require a full-time resource. That is often not the case. Transaction volume will likely dictate the need for a full-time resource.
This is true on all levels of the accounting department. While determining transaction level at the bookkeeping level is much easier, the level of need must also be assessed at the CFO. Clients often “graduate” from my services once they consistently need more than 10-15 hours per month. The next step is to find a CFO who dedicates their time to only 2-3 clients and can dedicate 50-60 hours per month to their clients.
Conclusion
Effective financial management is crucial for small businesses. The strategies discussed offer cost-effective solutions to meet diverse needs. Outsourcing, part-time resources, and blended approaches provide flexibility and efficiency. These methods allow access to expertise usually reserved for larger companies.
Remember, investing in finance isn’t a luxury but a necessity for growth. Adaptability and openness to new methods are key in financial management. As your business grows, so should your financial strategies. Consider further resources on financial strategies and navigating small business challenges. These insights will guide you in building a robust financial framework for your business.
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 an entrepreneur. Our expertise doesn’t just come from theory, it comes from practice.
If you would like to learn what a CFO can do for your small business, contact us now. We’d love to see if we are a good fit and can help you accomplish your goals.
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