Are you beginning to view your accounting department as a cost center full of overhead expense?

Are you not sure what they do all day but know that they seem very busy and often overwhelmed?

If one critical person in the accounting department left, would business continue on without missing a beat?

If these questions make you uneasy– you aren’t alone.

When we talk to many CEOs we hear the same thing: “When it comes to the financials, we don’t know what we don’t know.” That includes what their accounting department does on a day-to-day basis—and what information they should be getting from them.

For many companies the amount of information that the leadership team gets from their accounting departments is minimal, dated and not easy to understand. Not wanting to know the intricacies of the accounting function, many owners blindly trust their accounting staffs, and figure if the tax accountant isn’t complaining too much at year-end,  their accounting department is getting by just fine.

But are they? Could they be delivering more, more efficiently and with greater accuracy?

Here are some signs that your accounting department may need an overhaul:

Timing is everything. What would have happened to the Titanic if they knew about the size of the iceberg before they hit it? If you aren’t getting financials from your accounting department within 10 days after month-end, you are in the same situation. By the time you discover an issue 20, 30 or 60 days after the month ends you may find that a small issue last month has snowballed into a serious problem (“iceberg”) and you didn’t see it until it was too late.

Flat financials. So you are getting information from your accounting department, but can you use it? You should be getting real information from your staff– details such as which customers are driving your profits, what product lines are doing well, what is the productivity of your staff and your assets, as well as projections of where you are headed. If you aren’t, you may not see—or be headed directly for– that “iceberg.”

Business growth outpaced the skill set of the staff. Most companies have them—the bookkeeper or staff accountant who has been with the company from inception—who knows every nut and bolt of the business. But now that person is the “CFO.” Sometimes that person can grow into the role—sometimes not. It might be time to take a hard look at the skill set of your staff and get the right help in place to continue the business’s growth.

Busy-ness doesn’t equal good business. When was the last time your accounting department stopped and asked why they do things the way they do? Often times we find manual entry of accounting transactions when they could be automated, re-entry of the same data in multiple systems, and a LOT of unnecessary paper shuffling.

Old technology. Face it, when it comes to investment in IT, the accounting department gets the short end of the stick. There is nothing sexy about an accounting package (unless you are an accountant!) and it certainly doesn’t hold a candle to the fancy CRM systems that often are upgraded before the accounting systems. However, when used wisely, an investment in accounting system upgrades may just improve the efficiency of the staff, give you better information in less time and cost you less over all.

Your accounting department’s main function, beyond just record-keeping for the IRS is to provide you, the owner, with the best springboard for growth—information.

We often get called in to companies when the owner/CEO isn’t getting the information they need, when they need it and in the format that makes the most sense to them. Either the business has hit an “iceberg” or they are trying to avoid one.

How does your accounting department help you “spot the icebergs” in your business and how do they help you course-correct?

Did you know? There is still funding for consulting through the Jobs Act of 2010.

If you are a growing business with 7 or more full-time employees, and you find that help from a consultant could get you past a particular hurdle, you may qualify for funding for consulting through the Jobs Act.

Recently, Profit Point was engaged by the Small Business Development Center (SBDC) of Northwest New Jersey to do a strategic financial review for a client, using a grant from the Jobs Act. In this review, we analyzed the financials of the business and gave the client a 10-page report with our findings and recommendations. We met with the client to talk about our findings, and laid out a plan of where they should focus their efforts first. After implementing some of our plan, the client reported that margins were up significantly over last year.

In addition to financial consulting, the SBDCs offer a variety of consulting, classes and strategic counseling for established businesses looking to grow. And, you can’t beat the price—nearly everything is free; classes are a nominal fee.

As for the Jobs Act, what did it do?

Signed in September 2010, the Small Business Jobs Act, is one of the most significant small business legislations in over a decade. The law provided up to $50MM in grants to the Small Business Development centers (SBDCs) for counseling and training. Other critical resources were made available to help small businesses continue to drive economic recovery and create jobs. The new law extends the successful SBA-enhanced loan provisions while offering billions more in lending support, and tax cuts. More information can be found here or contact us for more information.

Ask any business owner if they ever have enough money or enough people to get the job done and their answer is probably a guffaw and a resounding “NO!”

When you ask them who they need (in a perfect world) you’ll hear they need sales people, operations people and line workers.  Rarely do they say they need a Chief Financial Officer (CFO.)

Ask any business owner that has left their accountants’ office during tax time still puzzled on why they owe so much to Uncle Sam or how they could have made so much on paper but don’t see it in the bank.  Many accountants can’t answer these questions.  A CFO can.

If you are worried about looking foolish in front of a CFO, or are embarrassed that you don’t have a grasp on your numbers, don’t be. You aren’t alone.

If you have a handle on your financials but still find yourself with questions about product line or customer profitability, whether you should pay back your loan or take the money and use it to grow, or why you never seem to have enough cash, you should consult your CFO.

If you believe your CFO is strictly a glorified bean counter, you have found the wrong person for the job. If you think that a CFO is really short for CF-”no”, that is, someone who will shoot down all your plans or ideas, you’ve found the wrong person.

If you are looking for someone to help you map out your growth, “run the numbers” and provide you options backed by analysis, and you naturally turn to your CFO, you know you have the right member on the team.

But most businesses don’t have that team member in place. There is an empty, yet critical, spot on their bench. It comes down to one change in mindset on the part of the business owner:

Hiring a CFO isn’t an expense, it’s a growth strategy.

A CFO can provide you with the best springboard for growth: information.

Information can be in the form of financial analysis and trends or forward-looking projections. It can be a scenario analysis (“if I do X, then my profit could be Y”) or a post-mortem (“why did this job run over budget?”) A CFO with good business sense can take your operational and financial data to give you a picture of the effectiveness of your daily operations. That’s pretty powerful stuff.

So, you can muddle along and find out what works through gut instincts or trial and error. You can hire another sales person or line worker and you can grow in increments. Or you can fill that empty spot on your bench with a CFO, even on a part-time or consulting basis, and grow exponentially. You just need to change your mindset.

When businesses downsize or look for cost savings the first place they look is their staff. Employees are expensive—you have to pay them a salary, benefits, “house” them for the work day, and give them whatever equipment they need to complete their work. Naturally when it comes to cutting costs, business owners see reducing these “people” costs as a quick way to save money.

Here’s a twist. Before you start thinking about headcount reductions, look to your employees for costs savings by ASKING them for their opinion. I know—it probably isn’t comfortable to admit that you need to save money if the business isn’t doing well. You also have to deal with the mind-racing and jumping to conclusions of inevitable layoffs. There is a lot to manage when you go this route.

As the business owner, you may need to shift from thinking you’re the only one who knows how to run the business, to being open to input from the lowest levels within your organization. When GE went through this process of seeking out cost saving ideas from deep within the organization, a line worker in one of its plants commented that for 25 years GE had his hands, all the while they could have had his brain as well—for nothing. Pretty powerful.

So do yourself (and your company) a favor—ask. Ask your employees how you can save money, how you can improve operations, how to grow the business. Remember those closest to the work know it best. They know a lot more than you give them credit for.

A critical thing with opening yourself up for ideas is also being open to act on them. Here are a couple of ways to encourage ideas:

Share the savings: If employees think that cost savings are going to wind up in your pocket, and yours alone, they’d be less likely to volunteer ideas. Give them a portion of the savings and recognize them in front of your peers or reward the best ideas with dinner for two paid by you.

Have Belly-Flop awards. Every idea you get may not be a good one, so have some fun with it without embarrassing the person who made the suggestion. If you pursue an idea and it doesn’t work out, award it the “Belly-Flop” award and analyze what went wrong, and learn from it. The main point here is you want to reward the risk that person took by suggesting something.

Watch the eye-rolling: You know what I mean, whether literally or figuratively, there is always one or more employees that roll their eyes as you announce your next big initiative or idea. Before you dismiss them as small-minded, take a moment to find out what their qualms are. In their response may be some warning signs of a project about to fail—or cost too much.

So take time in your day, week or month to ask, listen and do. If you show you are open to ideas from the ranks– and take them seriously–more will come, and so will your solution for turning around your business.

There is a lot to be said about a star employee—one that holds the company together—the go-to guy or gal that helps run your company smoothly. They may have a big role in your company or they may just be the billing clerk who gets the invoices out on time and accurately. You take them for granted—until they are gone.

By “gone” I mean any number of ways: They leave your company completely, they get sick and are unable to work or they just “check out.”

Most businesses have some backup plans for data—redundant systems, servers, backups to the cloud. But I am surprised that most companies don’t have a backup for their most critical information—the information that resides in the heads of its employees.

Think about how much knowledge walks out your door every day. How would your business be affected if a few key people didn’t come back?

What if that employee is you?

In small businesses there is little room in the budget for redundant employees but there is NO room for the disruption that ensues when a critical employee is absent.

You as the owner need to come up with a backup plan—otherwise you will find yourself constantly distracted and firefighting while at the same time finding someone to replace him or her. It doesn’t have to be a massive undertaking—you probably already do it for when employees go on vacation.

Think of it as extended vacation planning. Here’s how:

Make upkeep of standard operating procedures part of everyone’s job. These don’t have to be long, formal documents but they should entail critical pieces of information about standard policies and procedures– from how much material you order to where all the passwords are for the bank accounts, to the way that certain customers like their invoices processed.

Develop a pipeline of talent. I’ve worked in organizations that get this right—so when there is a vacancy it’s no sweat, they just move up the next person they were grooming for the position. By grooming, that means ensuring the understudy has had the experiences and some of the training the critical employee has while allowing him or her to pinch-hit during vacations or business trips. This will ensure a smoother transition when the time comes.

Cross-train. This may be the easiest to do but the hardest to find the time to do too. The best way to do this is by allowing people to work on projects together, paired with people with different skills or responsibilities to allow each other to see what the other is doing .

Shuffle the deck. Have one person who is doing all of your critical activities? Maybe you need to shuffle the deck and allocate different critical responsibilities to a few different people. This way if one person leaves business doesn’t come to a halt. Spend some time and develop your A-list of critical tasks and make sure you don’t have all your eggs in one basket—with only one person doing them.

It’s time you had a backup plan for the rest of your data—the data that walks out your door every evening. Develop your backup plans now and avoid the brain drain when a critical employee leaves.

March is the time when most businesses start collecting and turning over their documents to their accountants to prepare their taxes. For some businesses, it is pulling out a shoebox of receipts, for others it may be a scramble to bring their books up to date. In either case there is a certain level of financial “madness” that happens in March. There is a simple way to avoid the rush and improve your business at the same time.

The antidote to financial March Madness is simple—it’s setting a monthly closing date.

This may seem like accounting-talk, and maybe not that important. A closing date is simply a deadline by which all entries need to be made for the previous month. All large companies have a closing schedule and it is important for small businesses too. Getting the books updated is often a low priority for business owners when there are fires to fight and customer calls to return. They know there is at least one closing date they will meet—the end of the year to file their taxes. Because they haven’t been keeping their books up monthly via a closing schedule, businesses are scrambling in March to get everything updated.

We like to have a closing date that is no more than one week after the end of every month. So for example, in February, we’d like to have the books closed by the first week in March. There are a few benefits to having a closing date:

Ability to course-correct: Having your books closed timely allows you to review what happened in the previous month and make changes before another month passes.

Accountability: If the bookkeeper knows someone will be reviewing the books by a certain date they will have them done by then. And, if that someone is the CFO or other consultant, it provides a level of accountability to the business owner to hold their feet to the fire and review performance for the prior month.

No changing history: When the books aren’t closed, it is easy to make entries in prior periods. This is one of our pet peeves because it changes the history. A closing date sets the financial statements in stone so that they do not change when you run them each month. For example, the results for February stay the same whether you run the report in March or in June. It sounds simple but it is important when you are analyzing the books.

Setting a closing date may sound overly simple, but keeping to a closing schedule will create a rhythm and consistency in the upkeep of your books. Find a date that works for you, whether it is one week or two weeks after the last day of the previous month and stick to it. It will not only help you get better information for your business but you will find a monthly closing date will also help you avoid the rush of March Madness.

If you’re like most companies, at some point you’ve had a large customer that’s made up a majority of your income. We refer to them as giant clients. You know the ones– they send you a steady stream of orders, followed up with big fat checks. In the back of your head you know you’ve got all your eggs in one basket. And someday that basket is going to tip over. It’s hard to think about that when you are so consumed in the day-to-day delivery and service.

And then the basket tips over and all the egg spill out. If your primary clients were concentrated in the financial services industry anytime in the past few years, you know what I mean.

The basket tipping over may be the result of any number of factors: the economy, a change of leadership, a buyer changes companies, new regulations or any number of factors. But when it happens, it could be devastating for you and your company.

So before that day comes, it’s a good idea to start diversifying your portfolio of customers—adding more and possibly in different industries. Easier said than done, right? You’ll need to get creative and take another view of your service or product.

Here are a couple ways you can think creatively:

Repurpose. Maybe you’ve developed a proprietary workflow, streamlined your processes or aggregated enough information to put together a database that is worthwhile. Can you use it for a different application? Who outside your current target market might find those one or two pieces useful?

Resell. Maybe there is a large competitor in your market that provides similar products or service to yours. Maybe they want access to the niche that you serve but can’t with their infrastructure and costs. Re-selling your product to them may give you greater access to your market and economies of scale.

Rebundle. Maybe you have a specific market you sell to, say large companies, however your product or service may benefit consumers or smaller businesses. Can you pare back some of your offerings to serve clients with smaller budgets? Maybe they don’t need all the bells and whistles you offer now, and while you might get a lower “ring” per sale you might find them quite profitable.

Reframe. Take a look at your product or service and look at it really objectively. Break down each step in providing your service or in your manufacturing process. What other markets might benefit from what you sell? Think about Cirque D’ Soliel– they took “circus” to a whole new and different level.

Serving giant clients can be a love-hate relationship. You love the steady cash flow they provide but you hate what will happen to you and your company when they leave.

No one wants to think about the cutbacks that would happen if the giant clients decreased their orders from you. The best way to protect yourself for that day—and it is inevitable– is to be prepared. Diversify your client base.

OK, I’ll be frank. Sometimes business owners can be the greatest downfall of their own companies. You’ve probably heard the hundred ways this is possible from management and HR issues to lack of “business” skills. I’m in the business of finance, so I’ll talk about only one—handling money.

There are two scenarios where a business can be jeopardized by the way the owner handles money:

1. When the owner takes too much cash out or depends on the business to sustain their lifestyle.
2. When the business owner lends too much to the business and seriously jeopardizes their personal financial wellbeing.

I’ve seen both and it is pretty ugly.

In the first case, a business is doing well and kicks off a ton of cash. After a year more or less of great returns the owner begins to lose the “bootstrappy-ness” of their beginnings and feel things have been going well enough to buy a bigger house or upgrade their car.

They start to grow into their business’ cash flow.

Some start taking more out in draws—a lot more. And if they aren’t careful, some take out more than what the business is generating. I’ve seen business owners run up hundreds of thousands of dollars on the business line of credit to purchase personal items.

The biggest problem with this: the business is starting to starve.

That cash that gets sucked out to buy the car or the house should have been left in the business for the “rainy-day” fund—or the “hire a new employee” fund—or “upgrade our systems” fund—or the “new product development” fund. But as soon as it hits the business bank account it is whisked away.

Growth in the business stops or slows significantly.

What is more devastating is what happens when the market turns south. The credit line is almost maxed—and those steady cash withdrawals—well, they aren’t there for the taking anymore. So what happens to the owner?

They still have the mortgage to pay on the large house and on the fancy car. Their kids are enrolled in private school. They have bills to pay—but the cash isn’t coming in. They head into the death-spiral of cutting costs in the business, and suffocating it even more before they decide to start calling the bankruptcy attorneys—for their business and for themselves.

On the other end of the spectrum are the other business owners—those that put all of their life savings and then some into the business. They become maxed out.

They have a payroll– and they’re not on it.

Or if they are, they take a measly pittance for the work they do. They have tapped all their resources and have no other source of funds—the banks won’t lend to them because they have no collateral (it’s all in the business) they aren’t generating the returns or aren’t in a sexy-enough business to win the attention of private money or all other sources have proven to be dead ends.

The American dream of owning a business turns into a nightmare, exhausting them and exhausting their families who bear the burden.

The problem with these companies is that, in most cases, there is something broken within the business.

The business owner is too busy fighting fires to step back and see the real problems. A colleague of mine has a great question he poses to entrepreneurs. “If your waste basket caught fire every day, and you had to put the fire out, how long would it take you until you got fed up enough to figure out what’s making it burst into flames?”

These business owners they feel they have to work harder to get to the “Mecca” where the business is kicking off great returns. Meanwhile, they have, in essence, lent their personal money to their clients by extending terms to them, have issues with late payers and have costs that are out of line with their pricing. They don’t see this—they just are reaching for the next sale.

What they don’t realize is that that next sale starts the cycle again.

These two situations may seem like opposite ends of the spectrum but they are really the same issue–the line between business money and personal money is blurred.

When we have these conversations with business owners, we’re seen as naysayers and meddlers. In either case our message isn’t one the owner wants to hear.

The message is simple—it’s about balance.

It is about balancing the need to leave enough money in the business—or not contributing more—and giving the owner enough compensation to enjoy the lifestyle they want to live.

There is no magic formula on calculating the balance, unfortunately. It’s a give-and-take– an imperfect science. Because the flow of cash between business and personal are so intertwined, when one or the other is way out of balance the end result could be disastrous. It’s an important part of planning, and one that should be considered with as much importance as buying a piece of equipment or buying a new house.

Many companies that offer unique or custom products figure out what to charge by adding up their costs and tacking a markup on top of that. That’s called cost-plus pricing.  Without being careful, however, you may find that cost-plus pricing can actually benefit your customers more than you.

I worked with a company that had a system they used to quote prices for complex industrial jobs. The system would add up all the direct material, labor and overhead costs and tack on a standard markup that would ultimately generate a price to give to the customer.

However, management thought that there was something wrong with the system. It kept generating estimates that were far lower than the previous year. After digging into the details, we found that they had changed the manufacturing process, resulting in significant cost savings in labor. The person who was in charge of inputting the costs into the sales tool followed standard procedures and put in the new, lower cost in the system.

No one caught the change for 6 months. The system used the cost-plus model, so with lower costs, the final price was lower, ultimately passing all the cost savings on to customers. For this company it meant hundreds of thousands of dollars of lost revenue—and profit–until the system was fixed.

There are a few downsides of cost-plus pricing.

Downside #1: Unintentionally passing along cost savings to customers. As in the example above, it is easy to see that without monitoring, you can pass on more to your customers than you think.  Our experience has also been that most of the time, cost savings are evolutionary– whether it is a minor change to a manufacturing process or simply hiring a new employee at a lower rate than existing employees. Efficiencies often come in small doses.

Businesses impacted the most are ones that deliver custom products or solutions to clients. If they build their estimates from scratch, or use previous jobs as a baseline and don’t adjust their markup for these cost savings, they may find that their customers are benefiting more than they are. Granted, there are times when passing along cost savings is beneficial, but at least it make it deliberate.

Downside #2: Leaving money on the table. While cost-plus pricing ensures that you cover your costs (and then some), it doesn’t take into consideration what your customers are actually willing to pay for it. A few targeted surveys may tell you if you are under-pricing yourself.

Downside #3: Inflexibility responding to competition. It’s rare that companies price their products without knowing what the competition is up to. However in a pricing war, there is only so much margin that you can lose to be competitive.  Over time, cost-plus pricing doesn’t incent the business to become more efficient—as its costs go up the price does too, until the company starts pricing itself out of the market. By then it may be too late to lower costs to keep its position.

Cost-plus pricing has its upsides because it is an easy way price goods and services, however if you use this method, be careful to monitor it. Otherwise, the “plus” sign may wind up in your customers’ pockets and not yours.

Have you ever wondered why you may be selling more and more but aren’t making any more money? You may have a problem with your mix.

Just as too much of one ingredient can ruin a recipe, mix can make the difference between profitability and losses, a cash crunch and money in your pocket. It requires a bit of number crunching, but it is well worth evaluating your costs to this level of detail.

Mix is a factor of what you sell, who you sell it to and ultimately how you get into your customer’s hands. Finding the right balance can lead to greater profitability.

Here’s a breakdown of the three.

Customer Mix Imagine you are a manufacturer of widgets. You may sell the same widget to many customers. Some customers are high-maintenance and require expedited shipping, others order small quantities sporadically leading to a distribution head-ache. Others have integrated their demand planning with your company so you can manufacture to their demand.

Each of these customers cost-to-serve is different and the pros and cons of all their special circumstances should be weighed with what they contribute to your bottom line.

Product Mix As a widget maker you sell Basic widgets for $1 and Deluxe widgets for $2. Deluxe Widgets cost more to make relative to their selling price, i.e. they have a lower profit margin.

While you may be enticed to try to sell more Deluxe widgets because they can bring in higher sales, look what happens to your bottom line if you sell the same amount in dollars of both types:

Imagine what would happen to your profitability if you decided to sell more Deluxe without understanding this? You’d be scratching your head wondering– “I’m selling more but I why don’t I see it on my bottom line?”

Channel Mix. What you sell is important, but how it gets to the customer can make a difference too. Think of the many ways a widget can be sold. It may be sold directly via an online store, through a distributor, or directly to a retailer. In each scenario, the same exact widget is winding up in the hands of the consumer but how much profit ends up in your pocket may be very different.

What can you do once you understand your mix? You can actually increase your profitability by strategically choosing which channels to sell in, what you sell and whom you sell it to.

You can make better pricing decisions when you come across a high-maintenance customer and you can identify if there are ways to reduce costs of your lower margin products.

You may even find you have to eliminate a product line, fire a customer or stop selling through a channel.

In other words, you may need to adjust the “recipe” of your mix to yield the best returns.