True story: No one in my family knows what I do. I have been married for more than 30 years, and my in-laws still do not know what I do. It turns out that they are not the only ones.
The world of accounting and finance seems to be a mystery to most people, including business owners who have started their businesses and enjoy significant growth. They know marketing, sales, and operations, but accounting and finance are a mystery.
Today, the mystery is solved.
But it is not really about solving the mystery. It is about getting reliable data, gaining a different perspective, and creating a valuable company.
Is This Your Reality?
Here’s how business owners can determine whether this mystery is impacting their businesses:
- Spending a lot of time talking about how to use QuickBooks.
- Spending a lot of time discussing how to record transactions.
- A substantial part of every meeting is devoted to talking about the sources and accuracy of the data.
- No one looks at the financial statements because they are not useful in making decisions about the business.
- The business is consistently short of cash.
- Profits never seem to be what we think they should be.
- You have never heard the word “GAAP” in discussions of accounting. (GAAP is generally accepted accounting principles. I have encountered more than a few owners who want to redefine accounting — creating a lot of unnecessary work for an area that is already defined.)
If any one of these issues is true in your business, please keep reading.
At one level, these issues come down to time — wasted time — the CEO’s time and managers’ time.
At another level, these issues indicate missed opportunities. The owner and managers are working diligently and only receiving a fraction of the reward that they should see in terms of salaries, profitability, and increases in the enterprise value of the company.
Finally, these issues are about bad data and poor reports.
What is the solution? Working with professionals.
In this post, I am going to explain the five key roles in accounting and finance.
The Tax CPA
Most people know about the CPA (certified public accountant). They get a degree in accounting and must pass a difficult licensing exam. They are regulated by each state.
The experience most have is with a CPA as the one who prepares their tax returns. To them, CPA = Taxes. Many CPAs do not do taxes, but I will save that discussion for another day. (I am a CPA but never tell anyone because they will ask me tax questions.)
So why do you need a good tax CPA?
The tax CPA will help you optimize your federal and state income taxes and keep you compliant with the taxing agencies.
A good tax CPA will educate you on the business decisions unique to your industry that have tax implications. If you are not getting educated, ask the tax CPA to educate you or find one who will. Hiring a tax CPA with substantial experience in your industry can be important. I have one client who changed tax CPAs, and the new one showed the owner that he was missing an industry specific tax deduction that saved him more than $40,000 in taxes.
One Phrase Description: Tax Guru
The Summary: Every business owner needs a good tax CPA with industry specific experience.
The Warning: Do not use a tax CPA to design your accounting system. That system must be designed with the end in mind — the reports that you need to run the business (not the tax return). You will need a virtual CFO (chief financial officer) or contract controller to design (or redesign) the system.
The bookkeeper or accounting clerk is where most companies start. Why? Because someone has to handle the accounting transactions — sending invoices, collecting receivables, entering and paying vendor invoices, processing payroll, and reconciling the bank accounts.
A good bookkeeper is quite valuable. Unfortunately, you do not realize the value until you have a bad one. A good one makes you wonder how difficult bookkeeping and accounting really are.
Here are the signs of a good bookkeeper:
- No customer complaints about incorrect invoices
- No overdue accounts receivable
- No vendor complaints about incorrect or late payments
- No payroll surprises
- No cash surprises
A good bookkeeper will not cost the CEO much time and will make sure the data in the accounting system is accurate. Life is too short to endure a bad bookkeeper or accounting clerk.
One Phrase Description: Accounting Operations
The Summary: Life is more pleasant with a good bookkeeper.
The Warning: Do not let the bookkeeper have complete control of cash. Designing cash processes which have good segregation of key cash duties will minimize the opportunity for fraud.
This person has an accounting degree and is probably a CPA, but he just does not do taxes. He is a professional with at least 30 college hours just in accounting.
The person in this role will focus on getting your accounting books “closed” each month and make sure that the books are kept on the accrual basis of accounting (not tax or cash). Accrual accounting means that revenue is recognized when earned and expense are recorded when incurred. For example, he will record depreciation, determine whether any expenses have been prepaid, and estimate expenses that have been incurred for which the vendor invoices have not been received. He will also ensure that all revenue has been recognized when earned.
Accrual accounting is GAAP and is essential for creating actionable reports where there are no discussions about what is “in the numbers” on the reports.
In some cases, the bookkeeper can handle these issues with the supervision of a virtual controller or contract CFO. In other cases, a contract controller will perform these tasks. Accordingly, the degreed accountant is often the last person hired as a company grows.
One Phrase Description: Debits and Credits
The Summary: The degreed accountant creates journal entries to make sure that your financial records are kept on the accrual basis of accounting.
The Warning: In a small company (revenue less than $10 million), determining who will perform the tasks associated with this role can be challenging, but these tasks must be done so that you can have actionable financial reports.
The controller is a degreed accountant with more and broader experience. Her charge is to make sure there is a system in place that produces reliable financial statements and has good internal controls to reduce the chance of fraud. While the degreed accountant completes tasks, the controller designs systems. The controller is an important manager on the company’s management team.
Frequently, the controller directs the annual budget process and informs managers of budget to actual variances. The controller may also manage cash.
There is no such thing as a good controller without accurate financial statements. If the managers are discussing what is in the numbers, then you are missing a good controller.
If you do not have reliable financial statements, then your other reports will not be reliable either.
Accurate GAAP financial statements will help you see the results of the business more clearly. Frequently, seeing the past more clearly will help management teams make better decisions about the future.
Furthermore, accurate GAAP financial statements will help you achieve a high price for the business when you sell it. A buyer who is uncertain about the financial performance of the business will not pay as much for the business. Uncertainty is an enemy of value.
One Phrase Description: Financial Statements
The Summary: The controller, whether virtual or full-time, will make sure that the income statement contains the revenue and expenses of the business and that the balance sheet shows all of the assets, liabilities and equity of the business.
The Warning: Do not settle for a bad controller. If you have a controller with bad numbers, fire the controller.
And now for the revealing of the mystery. What does a Virtual CFO do?
The CFO, whether virtual or full-time, is the executive who focuses on the profitability and the value creation in the business. Frequently, he is the architect of profitability and value creation. He “draws the plans” for how the company will make money and generate value for its owners. The CFO is trained to think in financial terms which is the way businesses keep score.
Here are some examples from my experience:
- Evaluating the key drivers for achieving optimum profitability and cash flow
- Specifying the management reporting needs of the business
- Constructing the business model (how a business intends to operate, earn a profit and create value)
- Optimizing pricing
- Determining the terms of an acquisition, merger or sale
- Planning for the transition related to an acquisition, merger or sale
- Obtaining financing required by the business
- Identifying and reducing the risks in a business
Often, Contract CFOs are most valuable when businesses are in a transition – where something big is changing. A significant transition creates a need for a new business strategy or a new business plan. Coordinating and drafting a strategic plan is one of the functions of a CFO. The CFO will have an important and different perspective on that new strategy – asking strategic questions about the business.
The Virtual CFO is an important role for companies with revenue up to $25 million. Although it varies by industry, companies with revenue greater than $25 million often have a full-time CFO.
As you may have noticed while we moved from bookkeeper to CFO, we have shifted from tasks to strategy. The CFO plays the most strategic role and the least task-oriented role. The opposite is true for the bookkeeper. The controller is more strategic than the degreed accountant.
One Phrase Description: Financial Strategy
The Summary: The CFO is the master of the financial strategy — optimizing profitability, cash flow and enterprise value creation. He helps the company keep score.
The Warning: If the other roles are not filled, the CFO will have less impact on helping owners optimize profitability, cash flow and enterprise value creation.
Think of these five roles like golf clubs. You need all five in your company (a full golf bag) in order for the business to perform well. One of the challenges of a smaller business is determining how you can fill all of these roles because you cannot afford to hire all five. Otherwise, it can be quite lonely at the top. In my next blog post, I will discuss how to solve that problem and how to find and hire these important resources.