“Profit” is Not a Dirty WordPosted on December 17th, 2018
Outsourced Accounting Department, Inc.
In the news recently, General Motors announced the closing of several plants causing an uproar in Washington, especially after the government bailed them out only a few years ago (which in truth was to rescue the economy, not just “GM”). So what’s the problem? Is GM just being greedy, or unappreciative, or what?
At the risk of over-simplifying the matter, a while back I worked for a company as its Vice President of Finance. Due to the loss of a major contract the company had been counting on, the owner of the company was forced to cut expenses, which included among other things, temporarily halting some employee benefits such as matching contributions on the company’s 401(k) plan. Shortly after these measures were announced, a disgruntled employee left a note on the bulletin board accusing the owner of being “greedy.” When the owner saw this note, he called me into his office to show it to me, and he was visibly heartbroken.
The truth of the matter was, despite the company’s losses and tight cash flow, and because of the owner’s compassion for his employees, he was avoiding making any staff reductions, even though reductions were warranted under the circumstances. Instead, he invested more and more of his personal funds into the business to fund its operating losses and keep the company afloat, while continuing to attempt to “grow the business” to restore profitability – until, that is, the bank stepped in and put a stop on everything because the company continued to show operating losses. Ultimately, he was forced to sell the company in a distressed sale. So a lot of those employees eventually lost their jobs anyway, and the owner ended up having to pay back a large amount of the company’s debt personally.
As I have talked about in several articles, profit is not just a “number,” it’s a critical component of cash flow, and without it, the business will eventually die. To illustrate, the below Profit & Loss, Cash Flow Statement, and Asset-Based Credit Facility – Borrowing Availability, reflects the dramatic impact that operating losses have on cash flow:
Note the large “over-advance” on the line of credit. This reflects the funding requirement from external sources caused by the operating losses. The reality however, is that a bank isn’t going to knowingly fund these losses, as profit is (ultimately) what repays debt in the first place. So in lender jargon, there is no “source of repayment.” Nor will most investors be interested who are also looking to the company’s earnings for a return on their investment.
The point is, when a business is losing money, those funds have to come from somewhere. Those losses represent being drained out of the company to pay suppliers, loan payments, and yes, payroll! When the funds eventually dry up, the business either dies, or makes the expense adjustments necessary for survival. Or, in the case of what large companies like General Motors did a few years ago, allow the government (you and I) to fund their losses. But sooner or later, even tax money can run out (whole different topic).
The moral of the story is, if a business cannot be made to operate profitably, someone is going to end up “holding the bag.” The only question then is, WHO? The bank? As indicated above, not if they can help it, banks are risk averse by design; taxpayers? possibly, whether they like it or not (if the company is big enough to have an economic impact); or, the owner / shareholders – most likely, as they have the most at risk. But (most) business owners and shareholders don’t invest their money into businesses just to lose it, and they are not going to keep pouring money into a losing proposition. They are interested in a return on their investment (“ROI”), or in other words – “Profit,” the motive that led to the creation of those jobs in the first place, .
Part-Time vs. Full-Time Accounting StaffPosted on December 9th, 2018
Outsourced Accounting Department, Inc.
In my previous article, “Difference Between a Bookkeeper, Controller, CFO, and Tax Accountant,” I briefly described the responsibilities of these various accounting roles. In this article I will discuss the advantages of outsourcing these tasks vs. when it’s time to bring them in house.
To start, this article from the October 2016 issue of Entrepreneur Magazine provides a good overview of accounting roles: “How and When to Grow Your Company’s Accounting Function.” One role the article leaves out is that of the Controller, which falls between bookkeeper and Chief Financial Officer. The difference between the two is that the Controller’s position is more of an accounting role, while the Chief Financial Officer (CFO) role is more “big picture.” In reality, sometimes they are combined into one position, which I believe is what the author of this article was assuming.
Again, in our business, the organization chart would look something like this with the client in the traditional role of “Chief Executive Officer,” and the boxes in red are the services we typically provide:
In our business, the data entry may be performed to a degree by the small business owner using QuickBooks, and to a larger extent by a part-time bookkeeper on our staff. Or in some cases, it’s performed entirely by our staff person when the owner doesn’t want to have anything to do with bookkeeping.
The next level up on the chart then is the Controller, who reviews, adjusts, and closes the books after everything has been entered and reconciled by the bookkeeper, and then issues and analyzes the financial statements (going back down the right side of the chart). The emphasis here is on tying out the client’s books to source documentation such as loan documents, capitalizing and depreciating fixed assets, and matching costs to revenues (or in the case of the latter, on “management” and “financial” accounting vs. “tax basis” – see previous articles referenced above and below). I refer to this “value-added” level of bookkeeping as “Part-Time CFO/Controller.” This is where I believe we differ from individuals or firms that perform only data entry or QuickBooks consulting functions, who often leave it up to the tax preparer to “fix” the accounting at year-end, and often in their tax software, not your books (thus rendering your books completely useless for managing and planning your business).
While the business is small, the internal accounting can be accomplished on a part-time, “as-needed” monthly basis, with each accounting level remaining more affordable during the early growth stages. Then as your business grows larger, the accounting functions become more full-time in terms of hours required, and that is when it’s time to consider bringing the positions in-house on your payroll. While there are no hard and fast rules as to when it’s time to add a full-time accounting staff, I tend to use these rules of thumb:
|Gross Revenues||Accounting Staff||Annual Compensation|
|Start-Up to $100,000||Outside Tax Accountant||$500 to $2,000 (Tax Returns only)|
|$100,000 to $5 million||Part-Time CFO/Controller||$2,100 to $12,000 (Combined)|
|$5 to $10 million||Full-Time Bookkeeper + Controller||$35,000 + 75,000 = $110,000|
|Over $10 million||Full-Time CFO||$75,000 to $100,000 +|
Obviously, every company’s accounting needs are different, so there will be some overlap between business sizes as to when you actually start adding a full-time staff, who, and at what salary. Also, a major controlling factor as to when to hire a full-time staff person is the company’s bottom line profit. A company with higher profit margins can afford to add staff people sooner than a company with thin margins. Aside from that issue, as I’ve said previously, most small business owners know when the time is right to add a full-time accounting department staff. But until that time, it is essential that proper accounting not be ignored, as that historical financial data will be needed later when applying for a business loan or selling the business.
Difference Between a Bookkeeper, Controller, CFO, and Tax AccountantPosted on December 2nd, 2018
Outsourced Accounting Department, Inc.
Often times I find that many of our clients are a bit confused as to the difference between various accounting roles, and therefore, the various functions our firm performs behind the scenes. In fact, most small business owners I’ve worked with tend to think in terms of “tax,” as that is the first accounting issue they learned they needed to address when they started their business. So the challenge we frequently encounter is one of educating our clients on how all of these roles tie together, and the importance of each role to their particular business.
An excellent “Glossary of Job Descriptions for Accounting and Finance” is published by Robert Half International, an employee staffing agency. The job titles highlighted in yellow in the previous link more or less correspond to the functions we perform. Of course the larger the business, the larger the internal accounting department that is required to perform the accounting function. Conversely, the smaller the business, the fewer accounting positions that are justified.
With very small businesses, many small business owners attempt to perform their own bookkeeping using QuickBooks. But then many often learn that QuickBooks is not as easy as its name implies, and they end up making a mess out of their books that someone has to clean-up, usually their CPA at year-end at CPA hourly rates. And worse, they often find that “bookkeeping” has become a distraction from running their own business, and a task they’ve come to dread. So, eventually, during the early stages of their business’ development, many small business owners discover that they are better off outsourcing the bookkeeping task all together so that they can focus their attention on their own business. This is where our firm comes into the picture, wherein we perform the “accounting department” function on as “as needed,” part-time basis.
In our business, the organization chart would look something like this with the client in the traditional role of “Chief Executive Officer,” and the boxes in red are the services we typically provide:
- Bookkeeper: Performs all data entry including bank and credit card transactions and reconciles same to month-end statements. Provides assistance to some clients who perform some tasks in QuickBooks and need our help.
- Controller: Oversees bookkeeper’s work; performs month-end adjustments and closing. Creates month-end financial statements and various custom reports for client. The emphasis here is on management accounting and financial accounting. Provides assistance to some clients who perform some tasks in QuickBooks and need our help.
- CFO (Chief Financial Officer): As a business grows, its accounting and financial needs becomes more complex. In terms of the functions our firm provides, this would encompass (on an “as-needed,”part-time basis), financial analysis including ratio analysis, and strategic financial planning including budgeting, projections, business plan assistance, and in some cases, communicating the company’s financial results to prospective lenders and investors. In terms of the above chart, the CFO role encompasses the positions of FP&A (Financial Planning & Analysis), and Financial Analsyst down the right hand side of the chart, which are all performed by myself (see Owner and Management.)
- Tax Manager: Converts the company’s books for tax accounting purposes for preparation of the year-end tax return; provides assistance in various other tax related matters such as sales tax, property tax, etc. (In our organization, this function is performed by an outside CPA firm, our affiliate, Kern and Associates CPA, P.A. which is owned by Marianne Kern, CPA (see Owner and Management). Marianne’s primary focus is providing tax assistance to our business clients who do not already have an outside tax accountant.)
- Payroll: While QuickBooks includes a payroll module, in our opinion, it is a tedious process that is more efficiently and economically managed by outside payroll companies. These company’s typically guaranty timely and accurate submission of payroll tax returns and payment of payroll taxes which most CPA firms I know of do not, and at rates that are more affordable to the client vs. what a CPA firm would charge. For this reason, we also see many CPA firms who prefer to outsource this task to a payroll company vs. offering this service themselves.
If you have questions on any of the above, as always, please do not hesitate to give us a call or send us an email. Our contact info is on our website.