Your Chart of Accounts can be an important tool to help you monitor your business and make intelligent decisions. Or not. It all depends on how things are set up.
The “generic accounts setup” should just be a starting point
Every business’ Chart of Accounts will include some of the same general accounts, such as cash, accounts receivable, assets, equity (hopefully), accounts payable, income, expenses, cost of goods sold (COGS), payroll taxes, etc.
However, I recommend that businesses never operate with just a generic Chart of Accounts, particularly when it comes to income and expenses. To really make your Chart of Accounts work for you, take the time to set up the accounts that are specific to your industry and how you want to monitor and manage your business.
What exactly would you like to be able to track and analyze? What level of granularity will help you determine how different aspects of your business are really doing? You need accounts that track this information
Example: Structural Concrete Contractor
Say you’re running a construction contracting business specializing in structural concrete services. To set up your Chart of Accounts, start with the “generic” recommendations for construction contractors and then customize from there. Some of the things you may want to track include:
• Labor costs by pay category – To give you an understanding of your regular time pay, overtime pay and fringe benefits costs.
• Materials expenses by material type – Ideally your Chart of Accounts will mirror the details in the “Schedule of Values” (i.e. a breakdown of what it will cost to complete the job) that you use to create your bids.
In other words, don’t just lump rebar, concrete, wood and other materials into one “materials” account. If you do, then if you go over on materials, figuring out why will take a lot of work. Tracking materials expenses based on the same line items that are on the Schedule of Values lets you easily make an item-by-item comparison of actual to plan and quickly pinpoint the problem area.
Having this information available is helpful even if you don’t have any overages. When you’re three months into a six-month project, this data will help you determine if you’re ahead of the game or behind.
• Indirect costs – Think about how indirect costs impact how you want to track the performance of the job, and set the accounts up accordingly.
Need help getting your Chart of Accounts set up right? Give me a call and put my broad experience to work for you.
Pity the poor accounting department.
When business is booming and everyone is high-fiving that sales went up 25%, management starts to think about hiring more production staff to handle the extra volume. But the impact of the extra sales volume on the accounting staff is often ignored.
However, when revenue drop off, the staff reductions often hit the accounting department first. With optimism running high that sales will get back on target, no one wants to cut sales, customer service or production staff. So the accounting team takes the hit…even though they still have a great deal of work (such as processing payroll and ensuring the lights stay on) that’s not tied to sales volume at all.
Inadequate accounting staffing levels can hinder your company
Consequently, whether their company is growing or shrinking, many Controllers and Accounting Managers feel like they’re just treading water. With staffing levels inadequate for the volume of work to be done, analysis and other high-level tasks take a back seat to keeping up with the basics, such as creating invoices and paying bills.
In situations like these, there’s a lot that may be falling through the cracks. For example:
• No one is looking at the likely impact of shrinking sales on projected cash flow, and how this will affect operations. Will you run into a problem with your bank on your loan covenants? Will you be able to continue taking advantage of “early pay” discounts from your vendors? Will you make payroll?
• Internal control processes are not being followed. When something doesn’t look quite right, no one is taking the time to investigate why the numbers are what they are. Or even worse, perhaps no one is taking the time to look at the numbers closely enough to even notice that they don’t look right.
• You’re in danger of growing yourself out of business . No one is looking at how increased sales volumes will affect your staffing and working capital needs.
The solution: bring in a part-time CFO
A part-time CFO can help right-size your accounting department, working on an hourly or project basis to get all of those high-level accounting tasks handled. They can create and review the reports, do the analysis, provide oversight, help the Controller prioritize tasks, address projects that are important to senior management, and much more.
Want to learn more about the difference a part-time CFO can make? Give me a call! I’m here for you.
It happens all the time. A person who is viewed as an important part of the team leaves the company, and in their rush to fill the vacancy, management settles for someone who is not a good fit. Then that wrong person causes problems, and the company ends up worse off than if they had left the position vacant.
The reality is, it’s a bad idea to rush the hiring process. To ensure that you hire the right person for the job, here are some of the steps that should not be skipped:
• Update the job description – Talk to the department heads with whom this person will interact. Identify the job duties, the skill sets required to perform those job duties, and the soft skills necessary to succeed in the position.
In addition, be sure your written job description includes the physical abilities that are genuinely necessary to perform the job duties. I recently heard of a company that hired a security guard who managed to hide the fact that he was legally blind. By the time the company found out, it was too late. Since the job description didn’t mention the ability to see, they could not fire him without running afoul of employment laws.
• Have a fair wage scale – Your pay structure needs to be generous enough to attract quality people.
• Ask good questions during the interview – Your questions should enable you to evaluate if the person has both the job skills and the soft skills that you’re looking for.
• Check references – Verify that the statements on the candidate’s application are all true.
• Listen to your gut – If someone looks great on paper but is really rubbing you the wrong way, or if there seems to be a big disconnect between who they are on paper and who they are in person, recognize this as a “red flag.”
• Take advantage of the probationary period – Make sure your company has a clear written policy regarding the 90-day “probationary period.” During this time evaluate the new hire every 30 days. This way you can give them an opportunity to improve, and will build a case for quickly letting them go if they are clearly not working out.
If your company, like most, is running with a lean staff, you just can’t afford to settle for mediocrity. Good hires are productive, bad hires are counterproductive, and it can be difficult to fire someone once they’ve come on board.
Your company’s financial reports provide the basis for a great deal of decision making. You want to be sure that they enlighten rather than confuse! Here are five of the most common things that make financial reports confusing:
1. Poor formatting – Just pushing a button in QuickBooks and spitting out a report often doesn’t cut it. Taking a few minutes to spruce up the formatting can make a big difference in a report’s usability.
Beyond the “look and feel” of the document, though, poor formatting can also be a matter of inconsistencies in the data that’s being formatted, or data presented in an illogical order. For example, I’ve seen Income Statements that listed “labor” in six different places—none of which were at the top of the list, even though labor was the organization’s number one cost.
2. No narrative or context – Chances are slim that everyone who reads the report will be able to instantly discern what the data is communicating. It is helpful to point out the key issues, and possibly provide a conclusion or suggestions for improvement. In many cases it is also a good idea to include historical or industry data, to give context to the data being presented.
3. Undefined acronyms – When sharing financial information it’s important to speak English and not “accountant-ese.” Don’t assume everyone reading the report knows what “Cap Ex” or “EBITA” is.
4. Too much detail – In large companies it is common for the Income Statement to have 50 or more potential line items. Obviously, the report can get confusing if all 50 are included. It’s just too much detail! In cases like this, see if you can consolidate things on the main report, and then provide the ability to drill down into the details as needed.
5. Not tailored to the audience – Think about who the report is for, and customize it accordingly. Your rank and file employees, for instance, will be interested in different data than your investors and bankers, who may have different data needs than your executive team.
The bottom line is, if you’re going to do the work to gather and analyze the data, put in the extra 10% more time to polish the report. Confusing reports do not benefit anyone.
Need help creating financial reports that are a pleasure to use? Give me a call. As your part-time CFO, this is one of the many services I provide.
You’re ready to bring in a part-time CFO. Now what? What should you look at when evaluating candidates for the job?
Start with your specific needs
Chances are the majority of your part-time CFO’s responsibilities will be project-based. A logical starting point is therefore to take a close look at what you expect this person to accomplish. List the three biggest projects for which you need help, and then seek a CFO with experience addressing these types of issues.
Consider some consulting-related factors
Your part-time CFO will most likely be a 1099’d outside consultant. As such, you’ll want to find out:
• How quickly can they get up to speed? You want someone who can come in and hit the ground running. Do they have the background and expertise to pull this off?
• What is their availability? Can they offer you the hours and flexibility you need going forward?
• What resources do they bring? If a project gets too big, or if you need help from professionals in other fields, do they have a network of vetted experts they can tap?
Then look at experience and qualifications in general
Of course, in many ways hiring a part-time CFO is similar to hiring a full-time CFO. You’ll also want to consider all of the usual hiring factors, such as:
• Education, credentials, experience & track record – Be sure to look at the specifics here. Do they have a CPA? Do they appear to have the ability to understand your business? Do they have experience doing the broad array of things that you will ultimately need, or just a subset of this? For example, some CFOs are great with strategic planning but not well-versed in insurance-related issues. If you need both, this person would not be a good match.
• Communication & interpersonal skills – Will they be able to analyze the numbers and then communicate useful, actionable information to you based on what they find?
• Management style – As a part-time CFO, how will they fit in with both your management team and the staff members that they’ll supervise and/or work with?
• Personal chemistry – You’ll be working very closely with this person, and they’ll be working with the intimate details of your business. It’s got to be a good fit!
The right part-time CFO can make a big difference for your company. Before hiring someone, be sure to complete a thorough interview process, check references, and do a background check.
Before your fiscal year began you went through a full planning process, creating a business plan and the detailed budget (including anticipated revenue and expenses) that goes with it. But if you’re not sitting down once a month to compare actual results to projections, that budget is not doing you much good. In fact, you’re missing out on these 5 key benefits that monthly budget monitoring can provide:
1. Gain a clear understanding of where things stand – Ensure management can clearly see both problems and positive trends in real time, rather than being surprised at year end. In comparing actual to budget, look to see if revenue and expenses are in line with your plan and in line with each other. For example, if your revenues dipped by 10% versus budget, did your variable expenses drop as well?
It’s also important to look at sales by product line and anticipated seasonality. If revenues are way ahead of budget due to the unexpected success of one highly seasonal product, what will things look like when the season ends?
2. Hold sales accountable for performance – If they’re exceeding budget, the sales team should be getting public recognition as well as increased commissions. If sales are off, the sales management team will know they need a new game plan to get on track.
3. Avoid cash flow problems – Any variance from budget can impact your cash flow and cash flow forecast. While dips in sales create obvious problems, unanticipated increases can, too. For example, if sales soared to 35% above the projected level, would you have the resources in place to support it. ?
4. See where your staffing levels should be – For manufacturing and operations, be sure to compare actual labor and materials with what was expected, and then compare this with sales to see if things are correlated. Variations may suggest the need to change your investment in raw materials or adjust staffing levels, such as by adding an additional shift.
5. Identify issues with your cost of goods sold (COGS) – Even if you’re on target with your overall revenue figure, if your COGS is higher than expected for this level of sales your gross profit will still be down.
The bottom line is, monitoring your budget on a monthly basis will give management a clear understanding of the current month’s results, how the company is performing year to date, and whether you’re ahead of the game or falling behind.
I have often heard owners of small businesses say that their firm is too small to need written human resources (HR) policies. After all, their three employees are all “like family,” so the formality of written rules and regulations seems a bit absurd. Until, that is, something that an employee handbook could have enabled them to avoid goes wrong, and they pay the price for their laxness in terms of lawsuits, fines, morale problems and more.
The reality is, every employer should have written HR policies in place. These policies clearly communicate the benefits that the company offers, and clearly communicate rules and expectations to everyone so that they can be enforced evenly and fairly. They help protect the employer from employment-related lawsuits, and help ensure compliance with governmental regulations. In short, they’re a good idea.
How to create written HR policies
Luckily, getting a basic employee handbook in place is easier than you might think. The key is to avoid starting from scratch. There are a wide variety of customizable employee handbook templates and creation tools available online. Your trade association may have one as well. Just be sure to choose a template that is in compliance with the latest labor laws and appropriate for the specifics of your industry and state.
What should your employee handbook include?
While the following is not an exhaustive list, at a minimum your employee handbook should include:
• A brief explanation of what your company does, including your vision and mission.
• Standards of acceptable behavior, such as policies regarding work hours, breaks, overtime, dress code, absences and substance abuse.
• Safety-related rules, especially those needed to comply with OSHA or other regulations.
• Anti-harassment policies (including sexual harassment), the process for lodging a complaint, and your process for responding to complaints.
• Rules regulating the use of company computers, personal cell phones, internet access, and other things related to the use of electronics.
• Consequences for breaking the rules. What warrants immediate firing? What is your discipline process?
• Company-paid benefits, including holidays, vacations, sick pay, family medical leave, medical insurance, etc. For paid time off you should explain how the benefit is calculated and the process for scheduling and taking it.
• Policies regarding performance reviews.
If you need help getting an employee handbook in place, give me a call. As your on-call CFO, this is one of the many services I provide.
In order to properly manage your company you need accurate and timely information. How are sales? Is your marketing program working? Are there any problems in operations? And so forth.
Underlying all of this, you need to have a firm grasp of your company’s financials. For example…
• Are you on track to meet or exceed your goals, or do you have ground to make up?
• Is your spending proportionate to your sales level?
• Is your staffing level appropriate?
• Is your cash position getting stronger or weaker?
• Are you in compliance with your loan covenants?
• Is the information reported in your dashboard accurate?
Unfortunately, if you’re struggling with your month-end close, chances are you’re flying blind. You’re making decisions based on inaccurate and outdated data, and don’t have the necessary data to spot potentially problematic issues or trends before they get worse.
It’s time to turn the situation around
If your month-end closes are not timely and accurate, you probably do not have the right team in place. To change this you need to be sure that your Accounting Department is staffed with people who have the training, time and skill set to ensure all of the following get done:
• Basic accounting activities – Including accurately completing billing, recording purchases and related accounts payable, processing payroll, and maintaining up-to-date general ledger accounts.
• General ledger analysis – A detailed review of the general ledger to identify and research any unusual or nonsensible entries or account balances. This function should be performed by a senior-level accountant.
• Monthly financial statements – Timely preparation of an accurate Balance Sheet, Income Statement and Statement of Cash Flow, all in a format that properly segregates current assets and liabilities from long-term assets and liabilities. This is usually done by the Controller or CFO.
• Variance analysis – A written narrative prepared by a strong Controller or CFO that clearly explains any significant variances from what was expected in the budget or plan, and what caused them to occur.
Compliance with loan covenants – As explained in a previous article, failing to comply with loan covenants can ruin your banking relationship. Compliance with the reporting aspects of your loan covenants should be done by a strong Controller or the CFO as part of the monthly close process.
Need help putting all of this in place? Give me a call. As your part-time CFO, I’m here for you.
Your company is in growth mode, and you’re having a hard time keeping up. You’re definitely past the point where as the CEO you can do it all: manage multiple departments, cultivate banking relationships, keep an eye on the vendors, and much more. Things are slipping through the cracks, and you just don’t have time to give sales or operations the attention they need.
Meanwhile, you’re not receiving accurate and timely financial statements. Neither is your bank, which is not making them happy. And your budget…well, what budget? Who has time to create a proper budget?
If you recognize yourself in this scenario, it’s time to bring in an experienced part-time CFO to significantly lighten your load. Some of the many services that a part-time CFO can provide include:
• Developing a strategic plan, goals and budgets – Work with senior management to create a comprehensive strategic plan, as well as goals for this year and the next four years. Then create a detailed budget based on these plans and goals.
• Analyzing all the numbers – Look at the trends, review profitability by service or product line, monitor the budget, and more. Analyze your firm’s overall financial health, and provide expert advice as to where to go from here.
• Supervising the Accounting, HR and IT Departments – Plus work with department heads to identify areas for improvement and implement trackable solutions for these issues.
• Improving your accounting processes – Help your senior accounting personnel expedite the month-end close to ensure you get accurate and timely financial statements. Create easy-to-use dashboards that give you real-time financial data for effectively managing your business. Develop a template to also capture the information that lenders require.
• Identifying and eliminating wasteful spending – See where your money is going, including looking at whether or not you’re getting the best prices from all of your vendors, and right-sizing the Accounting Department.
• Providing valuable introductions – Bring in already-vetted professionals as needed, such as lawyers, CPAs, insurance brokers and marketing experts.
• Maintaining your banking relationships – Help you obtain necessary financing, and then ensure all loan reporting requirements are met.
Having a part-time CFO on board can give you and the rest of your senior management team more time to grow sales, improve operations and strengthen customer relationships. It also enables you to get better information, which leads to better decisions and even more success.
If you’d like to explore this idea further, give me a call. Part-time CFO services are what I provide!
Whether your company is in growth mode or trying to deal with flat or diminishing sales, there’s a good chance you depend on credit from your bank to help you pay the bills. Which is why I’m always surprised to see how many companies do things that ruin their banking relationship!
Bankers are generally very cautious people. They need to feel completely confident that the money they loan to you will indeed be paid back. Do one of the following actions, and run the risk ruining your banking relationship:
• Provide misinformation or no information. The quickest way to lose your credit is to surprise your bankers. The worst way is to lie to them. If your company is struggling, the best time to tell your banker that there’s a problem is as soon as you become aware of it.
• Add to your debt. In most cases, borrowing money from other sources (outside of trade payables) without your banker’s approval or consent will violate your loan covenants.
• Break the law. Your banker will not be happy if you incur a significant regulatory violation by failing to comply with a law, such as not reporting or properly resolving a hazardous spill, or getting slapped with a class action lawsuit because you didn’t comply with labor laws.
• Miss your previously reported earnings projections. Say your bank has raised a concern about your repeated failure to hit your leverage ratio, and you have assured them that this quarter you’ll hit the numbers. If you don’t, they might get “lender’s fatigue” and give up on you.
• Use corporate assets to buy luxury items. If your banker sees that, while you’re seeking to continue to expand your loan base, you’re using corporate funds to buy luxury boats, planes or cars, they’ll think twice about approving another loan.
• Miss reporting deadlines. It is vitally important that you provide accurate and timely financial statements, and be proactive about telling your banker if something is amiss.Most of the things on this list are typically covenant violations. Always keep in mind that your banker has the right to call your loan—and demand immediate payment—for any covenant violation, regardless of its magnitude. When that happens, I can tell you that it’s really not a pleasant position to be in.
Need help proactively managing your banking relationship? Give me a call. As your part-time CFO, this is one of the things I can do for you.