One of the most challenging issues facing a business owner, CEO, or founder of a small business is what is required for an effective accounting and financial process. A recent article in Entrepreneur magazine offered some general tips on how to think about developing the appropriate accounting resources matched to the stage of the company.
In our experience as outsourced CFOs for small- and medium-sized businesses in the San Francisco Bay Area, we often see small business owners overwhelmed with no strategy regarding their accounting and finance processes.
“Few [business owners] like to think about accounting. However, if you're going to stay in business any length of time, you'll need to perform some accounting functions.”
The article points out that there is a naturally evolution of the accounting process as the small business grows from the startup stage to a larger company.
Here is a summary of the steps outlined in the article:
1. Part-time or external-service finance professional
Every business, no matter how new or small, needs to do 3 basic things:
a. Accounting System – Setup and Overseeing.
“You’ll need to get your company set up by establishing a chart of accounts and determining the format for financial reports. En route, you will run into issues you hadn’t thought about when the books were initially established. You’ll want to periodically review the setup to make needed adjustments.”
b. Bookkeeping.
“This is the day-to-day entry of transactions into your accounting system and preparation of checks and invoices.”
c. Fraud protection.
“Unfortunately, fraud in small businesses is rampant. According to a University of Cincinnati survey, more than 60 percent of small businesses experience employee fraud and theft. These periodic checks will protect your business and remove temptation from your employees.”
d. Tax preparation.
“Depending on your business, you may need to pay sales taxes, quarterly estimated taxes, payroll taxes, etc. It’s complex. Consult an expert.”
2. Full-time bookkeeper, with part-time CFO
Even with a bookkeeper working for the company, that person still needs guidance and oversight from someone with more expertise and a broader business perspective: i.e., your friendly neighborhood CFO.
“This CFO should review the bookkeeper’s work and be available to answer questions. He or she will also work with the owner to interpret financial statements and internal metrics, develop financing strategies (e.g., with banks and investors), tackle tax planning, establish internal controls, develop forecasting budgets and, depending on the industry, handle compliance issues.”
“As Deloitte has described it: 'Today’s CFOs are expected to play diverse and challenging roles.' They act as stewards, protecting the company's assets. They assist in financial planning and analysis, tax and treasury tasks.”
3. Full-time CFO
If the SMB has grown to a large enough size and complexity, it may be time to consider a full-time CFO. Typically, these are companies in excess of $20 million in annual sales depending on the type of products, services, and industry that the company participates in. In addition, at this stage of the company, there are usually dedicated staff focused on key functional processes alike Accounts Payable (AP) or Accounts Receivable (AR)
“Accurate books are essential to running any small business effectively. Unfortunately, it is an often overlooked task. You should make sure that you have the proper accounting support as your business grows.”