Can an Accountant add financial value to your small business?

and the Minimum Viable Finance Function

Startup founders and small business owners often squirm at the idea of having a CFO in their business. I mean I get it, the value of a CFO in a young company is a highly contested subject. Do they add value?

There is a worldview that CFOs are only for big business. They picture a grey-haired executive, managing balance sheets of billion-dollar corporations. They demand whopping salaries and only deal with executives in corporate jargon — ROCE, EBITDA, GP, FCF.

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Alphabet soup

Whilst this may be the case with traditional CFOs, a commercially minded and savvy financial accountant can add an enormous amount of value to your growing business. They can provide tactical and strategic advice to help you improve cash flow, forecast financial performance and give you visibility over the levers you can pull in your business to improve profitability — all of which lead to the improvement of shareholder value.

In the SME space, it’s my experience that these needs are largely unmet. Many business owners assume their tax accountant will give them this advice. This isn’t always the case. Of course, there are outliers, but the large majority of tax accountants don’t have the capability to deliver on these services. Why? Because tax accountants are focused on servicing your tax needs. They will tell you what you can or can’t claim. They will help you with structuring so that you have your assets protected. They will ensure you remain compliant with the tax office.

Don’t get me wrong — maintaining compliance with regulatory bodies is very important. My point is, there is a difference between a commercial minded financial manager/CFO and a tax accountant. Indeed, they are both technically accountants. But your tax accountant’s focus is saving tax. The financial manager’s focus is about driving financial performance. These are completely different frames and capabilities.

The dilemma is that whilst all businesses can get value from the capability of what a financial manager and CFO can provide — they come at a cost. The dilemma is this — does the value a CFO create outweigh the cost?

For a business to appropriately assess this dilemma, we first need to understand the needs of a business within the context of their finance function.

The chart below outlines the hierarchy of needs for a business. 

Hierarchy of Needs: step aside Maslow

Level 1: bank balance accounting

Bank balance accounting is the most primitive and basic form of accounting. Typically conducted on spreadsheets, you tally all your expenses and income from your bank statements for the sole purpose of filing your tax. The advantages of this form of record keeping is that it’s cheap and easy to do. It’s a popular method for solopreneurs and businesses just getting started. My recommendation is that you can get away with this form of record keeping up to around $250k of annualised revenue. Once your business grows past that, it’s time to upgrade.

Level 2: Accrual based bookkeeping

Accruals based bookkeeping adds steroids to bank balance accounting and sets the foundation to your finance function. It’s the process of taking the building blocks of financial data and structuring them into a format for interpretation and analysis.

Most business owners view bookkeeping as a compliance-driven activity. It is often perceived as a low-value, commoditised administrative function. This is a deadly misconception. The reality is that bookkeeping is the most valuable layer of your business as it underpins the finance function of your entire organisation.

There comes a time where every business owner should outsource their bookkeeping to a professional service provider. I recommend you should do this as early as commercially possible so your bookkeeper can learn the ins and outs of your business, before you scale or grow quickly. Yes, you might think it’s cheaper and easier to do the bookkeeping yourself — but unless you’re an accountant, you’re probably doing it wrong. Secondly, you need to consider the opportunity cost of your time. Are you worth more $100 an hour? Of course, you are — delegate everything that costs less than that.

Bookkeeping should be maintained at least on a weekly basis, with the target of closing month-end within 14 days. This allows appropriate time to measure your results and make decisions from the numbers (see Level 3).

The illusion of tech

Cloud technology has been a game changer for SMEs. There is a myriad of accounting software tools and systems that automate a lot of process which were previously manual. Establishing this software yourself can save you money. But be warned. If accounting is a realm outside of your expertise, you should pay a professional. Clever UI and product marketing by software companies paint a picture of illusion that they are easy to setup yourself. If you have a simple business, sure it’s not hard to stuff something up. But as your business grows and becomes more complex, just be conscious of the Dunning Kruger Effect. Prevention is always cheaper and better than rectification.

Level 3: Reporting and systems

With your data and transactions being correctly accounted for, the next step is to report on the activity of your business. With so much business and financial data generated in your business, it’s easy to get overwhelmed with the amount of information. Simplicity is the key. A good financial manager will work with you to understand the financial drivers of your business model and establish additional systems to monitor and measure them. Remember, business data is not exclusive to your finances. You want to be measuring and managing other aspects of your business like operations, sales and marketing and people. Centralising all your business data allows you to identify trends and correlations to improving organisational performance.

The primary purpose of reporting is to communicate this business information to your relevant stakeholders. Accordingly, it’s all about context. What you report to your Management team will be different to what is reported to your board of investors. A financial manager will help you identify ‘who is this for?’ and establish a system from there.

Management reports should be issued on a monthly basis. These reports are used primarily for understanding business activity and decision making. Do not confuse this for the statutory year-end financial report issued by your tax accountant. Not only is it outdated, the purpose of that report is to satisfy regulatory bodies i.e. GAAP and the tax office and is not always reflective of your actual financial position.

One last point, don’t bother with this level if you haven’t got a robust process and a capable team doing your bookkeeping. As they say, “garbage in, garbage out”.

Level 4: Operational Finance

Operational finance is the process of taking your historical data and using it to build forecasts and predictive reporting. It’s the process of developing a rolling budget, maintaining short range cash flow forecasts and undertaking analysis on your target financial performance compared to your actual activity. For start-ups, this is critical, so you are on top of your burn rate and runway.

From my experience, many businesses see this function as a ‘nice to have’. Financial budgets and forecasts are a waste of time and energy because fundamentally, you don’t know what your business is going to look like next month, let alone 6 months from now…right?

I think that’s an excuse. The value in having a budget is that is serves to quantify your goals. It builds an accountability framework to driving what you want to achieve every month, every quarter, every year. Remember, humans lie to ourselves all the time. But numbers don’t lie. Having a budget leaves you nowhere to hide.

Operational finance can go hand-in-hand with reporting by a commercially minded financial manager. It’s common for a CFO to have input into this function as well.

Level 5: Strategic advisory

Strategic advisory is the sweet spot of a CFO. Partnering with a strategic CFO can help build you build the financial and operational strategy of your business. She can help you deal with funding mechanisms, pricing, capital raising, mergers and acquisitions and long-term shareholder creation. If you aim to be a ‘big’ business, a strategic CFO is worth their weight in gold.

Level 6: Tax compliance

Tax is at the top of the needs pyramid because every business needs to file their taxes. Ensure you work with a tax accountant that knows your industry and business model so you are operating from the right structure and maximising all of the tax incentives and deductions available to you.

The Minimum Viable Finance Function

I get asked a lot what particular services you need when building out the finance function capability of your business. Based on my experience in the industry and working with clients, here’s a guide of what it should it look like. 

Finance team for SMEs

Of course, your specific requirements may differ, depending on your type of business. For example, if you have external investors, despite your revenue and size, they will want regular updates on the financial position of your company — so it warrants an operational finance capability as an example.

Should I in-source or outsource my finance function?

A common question I’m asked is whether you should outsource or directly employ your finance team. My response is always this — is finance a core competency of your business?

If no, outsource it. The world’s leading organisations outsource functions of their business which are not core to their business model. Apple for example outsources it’s entire manufacturing supply chain because their core competencies are marketing and product innovation.

When it comes to finance, technology has lowered the barriers to entry for highly capable and experienced financial managers and CFOs that offer their services at a fraction of the rate of a full-time employee. These accountants are typically termed financial managers and Virtual CFOs.

What to look for in a finance team

When looking to engage with service providers to manage your finance function, ask yourself these questions:

1. Do they have experience dealing my business model and industry?

It’s critically important that you advisors have an intimate understanding of your business model and industry. This ensures you’re leveraging their industry experience and knowledge relevant to your business.

2. Do they have the capability to grow with me?

If you’re a high-growth business, ensure your providers can grow with you — particularly in more resource intensive roles like bookkeeping. Ensure you partner with a bookkeeper and financial manager that can scale up with your organisation. This means you will not have to continually replace and retrain people as you grow.

3. Do you trust them!?

Working with a great finance partner is like a marriage. They will be backing you and won’t be afraid to have hard conversations. Rapport is therefore important. Ask yourself, do I like this team and can I work with them?

In summary, working with a good financial manager can add a lot of value to helping you achieve your business goals. Knowing how to design it is half the battle.