As a start up or a small to midsize business, you are most likely either under paying, trying to save money, or over paying for accounting, because the scope of your accounting needs is not truly known by management. Unfortunately, this can cause several different problems in the overall health of the company. The simple solution is a Fractional Accounting Service.
I have run into these situations many times in my career, especially in small businesses or businesses that are just a few years old. Everyone is looking to cut costs in business, especially smaller sized businesses and start ups. The problem is, this usually comes back to bite them in a big way.
In my time as a Fractional Chief Financial Officer "CFO", I have seen companies get into large tax debts because they did not have appropriate controls and processes in place to ensure that their business's accounting was done correctly.
For example, a retail outfit that I work with, did not account for their inventory properly in year 1 of operations and all inventory costs were pushed to the Income Statement showing very low profit in year 1, instead of going to the Balance Sheet as inventory. Year 2 comes around and, because they expensed all their inventory in year 1, all sales that occurred in year 2 that was inventory from the prior year, ended up being 100% profit. Long story short, the tax bill for year 2 became too overwhelming for their business and expansion plans were cut due to the high tax burden.
The solution to this would have been to have an accounting department established immediately when the business was being opened. This mistake took their business off course which translates to a significant lost future profit.
This next situation was a truly grotesque example of a company not putting the important things first (i.e. accounting). A few years back, I was asked to come in and restate the first 2 years of financial statements for a commodity company. I immediately understood their mistake as nothing was being done correctly in the Zoho accounting software, literally nothing. After 6 months of straight work, their financials were solid, but the damage had already been done. They were moving tens of millions of dollars of these commodities, yearly, and because their accounting records were so bad the first few years, they found themselves in a ton of legal trouble with suppliers, could not find the investors needed to grow the business, and eventually the business had to fold. They literally created tens of millions in revenue in a very short time, only to be taken down because they didn't start the right way.
These are accounting horror stories, yes, but think about how even small decisions can make or break your business in the future. If you don't understand what is going on with your finances, there is no way to measure how the business is doing. It's that simple and is exactly why accounting practices should be developed at the start of the business or as quickly as possible if the business has not had it in the past.
On the flip side of this problem, you have these same types of businesses, overpaying for their accounting team.
At the beginning of many companies that have access to capital, management will build out an entire team (Staff Accountant, Controller, & CFO) because they think that is the accounting structure needed in the beginning. Realistically, one person could take on the accounting development from the Accountant through the CFO position.
Even more mature businesses have problems with over spending on their accounting department. As accounting processes get built, and the rise of technology takes over much of the time burning tasks of accounting, the department becomes "lazy". Point being, there is no need to have labor sitting around, on a monthly basis, looking for things to do, just build your accounting service to exactly what is needed.
What is the solution? Fractional Accounting.
Fractional Accounting Services Reduces Costs & Increases Value
Fractional Accounting Services are becoming a widely preferred way to run a business's accounting department at a much lower cost than the traditional format of accounting.
As discussed above, efficiencies created from developing more efficient accounting processes (getting rid of double or weak work), and technology, have created a market space for remote accounting services. No longer are, especially accountants, needed at a physical location. Everything can be, and should be, done electronically at this point in the game.
How a Fractional Accounting Relationship Works
For new businesses, a Fractional Accountant would interview the CEO/Owner to understand the business model. This then sets the path for how the accounting department will be developed. The great thing about creating the department from scratch is that there are no old processes that need to be unwound and the latest technology can be implemented to build very efficient processes from the get go.
In terms of cost, it all depends upon the amount of transactions and complexity of the accounting. But, we are talking about a low investment for the value that is given to your business.
For existing businesses that need a restatement or accounting processes developed, it can be a bit more difficult as there may be staff cuts, processes to change, and financials to be rebuilt. This usually results in expenses that are a fraction of what the business would have paid to have an actual accounting department from the beginning, but this work can still be a significant cost. The issue becomes, if the business doesn't get this under control now, the chances that it will survive are very low.
If you, as a business owner, are in any of the above situations, feel free to send me an email and we can start a dialogue.
Blue Collar CFO