7 Ways to Take Your Accounting to the Next Level in 2021: Tip #5

The new year is a golden moment to make a fresh financial start. This is Post #5 in a series of 7 practical tips for improving your company's finances in 2021.

Tip 1: If you have to enter more than 5 numbers by hand, find a better way

Tip 2: Lead with your balance sheet, not your profit and loss

Tip 3: Craft a detailed 2021 projection

Tip 4: Divide your business into divisions (5 or less) and track financial results accordingly

Tip 5: Do whatever it takes to get accurate (and timely) monthly financial statements

Jack and Ben (names changed) run a small professional services business in Los Angeles (also changed).

When I met Jack on Microsoft Teams about eight months ago, the company's finances were a complete disaster. They used a local version of QuickBooks to invoice customers. Banking transactions were entered in a different QuickBooks file maintained by an outside accounting firm.

Jack had no idea how the company was doing, and in fact, never had. His only financial statement was the balance in his checking accounts. He was absolutely tired of "flying blind."

A common crisis

Perhaps you're thinking, Wow, I can't imagine a business flying blind. I'm sure you don't see that very often!

Wrong. A staggering number of small and medium-sized companies (SMEs) are in the same situation as Jack and Ben. I'd venture to guess it's the norm more than the exception.

Here's why:

1. Preparing an accurate balance sheet and income statement often requires expertise that does not exist in-house at many small and medium-sized companies.
2. An experienced CFO typically costs $10,000 to $15,000 per month (US). Most SMEs cannot afford that. Even if they could, the CFO would be bored most of the time, or working on non-financial matters.

Because of this, many small companies just fly blind, or even worse, rely on inaccurate reports. The checking account balance takes on scary importance as the only "financial statement" management has available.

It's a recipe for misinformed decision-making, if not outright disaster.

Is a small business in this predicament simply stuck for life? Not at all. There are actually several options for achieving monthly financial clarity without hiring a full-time CFO.

Hire a part-time CFO

This is probably the best option. Of course, I may be biased because it's what I do for a career, but part of the reason I chose this career is because the model made so much sense.

The concept has been around for years, but really gained traction in the past decade with the rise of remote freelancing websites. You can post an opening on Upwork, LinkedIn, or Toptal today and likely have a stream of qualified candidates by tomorrow. The hard part is figuring out who to hire.

Before you jump on Upwork and tap out a post, let me give you some practical tips:

Tip 1: Clearly define the arrangement. Keep the scope extremely narrow. Simply say you're looking for monthly oversight of your financial statements, along with a monthly management meeting. Too often companies are looking for a bookkeeper, HR manager, business coach, tax expert, and financial statement reviewer all-in-one. That is where it gets messy and pricey.

Tip 2: Maximize references. I cannot believe how many people ignore references. If I were hiring a contract CFO I didn't know, I would ask for three references and call them all. Here are some questions I would ask the references:

Tip 3: Set a reasonable budget. In the US, I'd suggest finding someone in the range of $80 to $200 an hour. Below that, they're probably under-qualified. Above that, they're probably more focused on executive coaching or high finance. Another good rule of thumb is $1,000 to $3,000 per month, depending on the scale and complexity of your operations. If there is catch up work, that needs to be factored in as an extra one-time cost.

Tip 4: Leverage your own in-house staff as much as possible. To make this arrangement work well, you really need your own in-house bookkeeper or bookkeeping team. The CFO should simply review their work and handle the most complicated entries.

Tip 5: Consider a trial period. Agree to a say a 2-month contract with a mutual opt-out clause at the end of the period. Or, better yet, start with a small, one-off project and use that as the gauge for an ongoing relationship.

Take your time. I can think of at least one case where an underqualified candidate actually took the company's financial clarity backward!

Other options

1. Add a finance professional to the ownership team. This can be a very cost-effective way to achieve monthly financial clarity, especially in the case of a startup or growth company. On the down side, if it doesn't work out, the stakes are a bit higher!
2. Look for a local part-time CFO. This is especially feasible in large metro areas. You could still utilize Upwork, Toptal or LinkedIn to get the word out, but specify you are looking for someone who can come onsite. The upside is in-person interaction. The downside is more limited options.
3. Hire a full-time person and combine roles. Finance combined with IT, or Finance and HR, or maybe even Finance and Business Development. Put out a job post and see what sticks! If you go this route, don't forget the main goal is accurate, timely monthly financials. Everything else comes after that baseline is in place.
4. Hire a regular CPA firm. Most CPA firms offer a monthly financial service of some kind. It's often more surface-level in nature, but can be a valid option.

What are accurate, timely, monthly financials?

1. "Accurate" means 95% accurate. The goal isn't perfection because that takes too long. You're looking for reasonably accurate reports that don't fluctuate wildly month-to-month (unless your business is fluctuating wildly!)
2. "Timely" means completed 5 to 15 days after month end. If it takes longer than that, the month end process needs to be improved. The value of financial data drops precipitously as weeks pass.
3. "Financials" means a clean balance sheet and income statement (aka profit and loss). These are the foundational "must-have" monthly reports. Other reports are icing on the cake, and derive their accuracy from these foundational reports.

Back to Jack and Ben. In the past eight months their financial reporting has swung from the lowest lows to the highest highs.

The company has a new accounting system set up with a brand new chart of accounts. Within 15 days after month end, Jack knows exactly what the overall company made or lost, completely independent of how much money is in the checking account. Power BI reports break out profit by division so he can closely monitor margin trends in each business unit.

By making financial clarity the goal, and hiring help to achieve it, the days of flying blind are over!

This is Tip 5 of 7. Stay tuned for the next post!

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