Ahh, Spring. Finally, it is time to stop complaining about winter. . . and start complaining about golf! But that’s a discussion for another time.
With tax day firmly in the rear-view mirror, I thought it would be an appropriate time to briefly reflect on that process (as it relates to businesses), and put it in perspective. Entitled “The Sexier Side of Accounting”, this is the feature article for this quarter’s newsletter.
Recently I introduced a new service I am calling “The One Day Quickreivew”. This is targeted at companies that don’t have a CFO and would like an objective opinion of what they are doing well and what areas could use improvement–from a CFO’s perspective. You will find more details as well as a special offer on this service toward the bottom of the newsletter.
Finally, May marks the One-Year Anniversary of Michigan CFO Associates. It was a very busy and challenging year, but probably the most enjoyable year of my career so far. I have many of you to thank for your business, support, guidance, and encouragement. It has truly been a blessing, and I believe the best is yet to come!
As always, please feel free to forward this newsletter to anyone you believe may have an interest.
Todd Rammler, CMA
The “Sexier” Side of Accounting
No, this is not about your CPA wearing a bikini. It’s about the comparatively “sexier” side of accounting, known as Management Accounting.
Granted, it doesn’t sound very sexy. I can see your eyes rolling back in your head already. . . but stay with me for a minute.
Management Accounting vs. Compliance Accounting
In my marketing materials, I often describe my service as “Beyond Compliance Accounting”. But what exactly does that mean? It means that there is a difference between what a business should do to maximize profitability, and what a business must do to comply with various regulations.
- Management Accounting focuses on effectively managing the business, every day of the year
- Compliance Accounting, by comparison, focuses on GAAP and/or tax compliance, generally once-a-year events
Examples of Management Accounting activities:
- Ensuring that the company’s reporting contains data that is BOTH accurate and useful
- Bringing focus on the key items that have the greatest impact on profitability
- Creating projections to identify future problems and opportunities
- Performing thorough financial analyses in order to make effective business decisions (for example: How much overhead should be included in your pricing?)
What is the Primary Focus of Your Accounting Effort?
In many small companies the majority of the accounting efforts are directed primarily towards their compliance issue: the tax returns.
Often, the annual tax process goes something like this:
- Work all year long with little or no accurate, useful, month-to-month financial reporting, unsure of exactly how the business is performing
- Around February of the following year, the company bookkeeper gives the outside CPA various reports in order to do the tax returns
- The CPA goes through a high-level review of this data and makes adjustments so the tax returns can be prepared and possibly compiles a very basic set of financial statements
- Tax returns are filed, the financial statements are briefly reviewed, and little thought is given to this process until the next tax cycle
In some cases, the bank may require a review, or even an audit, but for most small businesses, this does not fundamentally change the process above.
Maximize Profitability While Maintaining Compliance
This “compliance focused” approach has little to do with making money. And making money is what Management Accounting is all about. Which is why I say it’s “the sexier side of accounting”.
Completing the company tax returns is obviously an important annual event that needs attention. The outside CPA is a critical advisor on how to structure a business, how to plan for and minimize taxes, and how to ensure that financial statements comply with Generally Accepted Accounting Principles (GAAP). This is highly important advice. Yet this process has little to do with day-to-day “operational finance” – where profit or loss are determined and where cash-flow is managed.
Usually the outside CPA has a basic understanding of the business. But someone – a Controller or a CFO – needs to understand the business and the numbers on a much deeper level, and on a more frequent basis. A few brief meetings a year with a CPA is not enough to really understand the company’s business issues and reporting systems; and this is where money is made. . . or lost.
Realize that the services of a knowledgeable CPA are critical.* Their job is largely compliance based, and businesses need to be in compliance with a variety of things.
The issue is that for most small businesses, this annual tax exercise is the majority – if not the sum total – of their financial reporting efforts. Compliance activities are being substituted for Management Accounting. Under these circumstances, it is unlikely that a company can achieve its full profit potential.
Michigan CFO Associates will move you beyond a compliance accounting perspective and, instead develop, analyze and interpret financial statements that help you manage and grow your business. . . and maximize profitability.
We will show you the “sexier” side of accounting. But we will not show up wearing a bikini.
*For a referral list of several exceptional CPA’s, please contact me at trammler@michiganCFO.com.
Contact Michigan CFO Associates, Inc. for more information on Management Accounting solutions for your company.
Consider an Advisory Board for Your Small Business
Small business owners often face issues for which they have little or no formal training or experience. In the course of a typical day you might serve as customer service representative, salesperson, inventory manager, HR director, or the payroll coordinator. Rarely does any one person excel at everything.
An Advisory Resource
Even the most talented entrepreneur can benefit from the impartial counsel provided by a board of advisors or directors. A board opens the door to experienced mentors a small business owner wouldn’t ordinarily access.
In addition, a board of advisors can provide introductions to potential customers and even funding sources. Many experts claim that an Advisory Board is such a powerful management tool that no small business should be without one. Despite a board’s usefulness, only about 20% of small businesses have boards.
Don’t be concerned that you’ll end up reporting to the board the way CEOs of public companies usually do. Instead, owners of privately held companies can choose to create a board that serves simply in an advisory capacity.
Right for a Family Business?
Family businesses, in particular, can benefit from instituting an advisory board. One family business owner solicited assistance from a family-business consultant, a retired executive from a major supplier, and the former head of another family-owned business to sit on his small businesss board with family members. The business owner credits the boards guidance in helping him install a more professional management approach, reducing staff turnover by 50%.
Issues to Consider:
- Plan ahead. Finding the right members takes some planning. You’ll want to determine your company’s goals and then pinpoint people suited to each of those tasks. You’ll also need to decide on the board’s – and each individual’s – role and responsibilities, as well as appropriate payment, length of tenure, and whether you need to buy directors’ insurance coverage.
- Looking for board members. Check your own business network for recently retired executives and managers who might be interested. Business educators, or even vendors may also be good choices. Aim high. Choose people that you think you will be able to develop a relationship of trust. There’s no harm in asking, and you may be pleasantly surprised when they accept.
- Size of your board. Two to three people is sufficient for an Advisory Board for a small business. They will be expected to meet with you (usually on a quarterly basis) to discuss and advise.
- Prepare for productivity. Prepare for each meeting of your Advisory Board by preparing an agenda which you’ll need to distribute ahead of time. (Include any related materials necessary.) Perhaps more difficult, be completely frank with your Advisory Board, sharing both your hopes and your fears. They won’t be able to advise you properly or well if you hold back.
- Meet regularly. An Advisory Board that meets regularly gets to know you and your business and can provide the management expertise you need to avoid mistakes and set your business on a true course. Think of an Advisory Board as a management think tank. Your Advisory Board members will serve as a sounding board, a source of ideas and expertise – and give you honest advice.
Excerpted from The A Team, by Anne Field, BusinessWeek SmallBiz Magazine, Winter 2006.
Contact Michigan CFO Associates, Inc. for more useful tips on success for your small business.
Locking in Key Team Members
Leading business researchers note that top performers evaluate job opportunities based on three essential criteria:
- Challenge on the job
- Learning and growth opportunities
- Chance to be part of an outstanding team
According to an international association of business executives, once you have top performers involved in your small business, what is the best way to “lock in” those key team members? Researchers have discovered four basic strategies:
- Treat team members with respect. Your competitors can easily lure key people away and have been known to offer cash incentives, thereby eliminating their losses for leaving early. An environment of mutual respect is categorized by an environment in which all workers are treated with fairness and respect.
- Keep key team members up to speed with what’s going on in the organization. This includes keeping them informed about certain aspects of succession and how these could impact them. This is particularly true in family businesses where an upcoming generation is perceived as a real threat to key team members.
- Reward each key employee fairly, and remember that you’re paying for results. A common problem in many organizations is that management has not really nailed down what results are required in the first place, and does not tie compensation to specific results.
- Identify the employee’s motivators. As one researcher noted, “Work should be one of a key team member’s satisfiers. Find out what’s important to them and what their key frustrations are. This will help you make the workplace a haven where they can achieve and feel that they belong.”
Contact Michigan CFO Associates, Inc. for more useful tips on managing your employees.
Small Business Success Story
A metro-Detroit professional services firm was facing a challenge. The 20-employee company experienced monthly cash flow problems, and was finding it difficult to make payroll as well as meet challenging accounts payable demands.
Need for Cash Planning
The company needed the help of a qualified and experienced financial professional to help with cash planning and projections, yet they could not afford to add a financial manager to the payroll.
Their solution? The company engaged Michigan CFO Associates, for a part-time Chief Financial Officer that specializes in working with small, growing businesses.
After setting up a custom cash projection model, the company is now better able manage and prioritize cash flow. The company can now effectively plan for vendor payments as well as reserve the necessary funds for payroll and other critical disbursements. They are also receiving useful insight into adjusting pricing and overhead to more competitive levels, which will provide additional cash to accelerate the plan.
A Flexible Arrangement
The small business receives cash planning, cash flow management and financial oversight expertise in only a few hours each month, which is extremely cost-effective for the company.
Michigan CFO Associates has gotten to know the business on an in-depth basis, and is available to offer high-level financial advice when necessary. Additionally, there is no burden added to the payroll and the work can be prioritized to fit the company’s budget.
“Businesses that partner with Michigan CFO Associates access strong operational finance and profitability analysis experience. We provide the tools and insight to manage business more effectively and more profitably,” stated Principal and Founder Todd Rammler.
Contact Michigan CFO Associates, Inc. for more information on an outsourced CFO solution for your company.