Expert Finance and Accounting Tips

SCORE ExpertAnswers

Words may characterize what a small business does or aspires to be, but numbers provide the true gauge of its success. Too often, however, many entrepreneurs prefer the simplicity of the “bottom line” without undertaking a full analysis of how they got there. They risk missing trends that point toward a potential opportunity—or a serious problem. Fortunately, cloud services such as financial management and accounting applications developer Intacct are helping entrepreneurs gain a clearer understanding of their business numbers.

Intacct CEO Robert Reid, a 30-year veteran of the business software industry discusses some of the more frequent financial questions and conundrums small business owners face.

 

Q:

Many potential entrepreneurs may put off starting a small business because they’re uncomfortable with accounting. What would you tell them?

You can easily draw in accounting expertise through outsourced services available from local, regional, and national accounting firms. These firms can be your trusted advisors helping you focus on the metrics of your business, and what typical businesses in your category are successfully achieving.

If you believe your business will undergo rapid growth, and you have the cash to develop a team, bringing in an experienced CFO will aid in the development of the business strategy and making the best use of your cash to maximize return.

Q:

Do QuickBooks™ and other off-the-shelf programs always meet all small business accounting needs?

For most very small businesses, QuickBooks™ is a natural starting point. It was designed to meet the needs of that segment of the business market, and many companies have built add-ons to cover ancillary needs. As a small business grows, however, it will start to push the limits of QuickBooks™ or other entry-level systems—things like adding on new business units or transactions in multiple currencies. It is at that point that most organizations look for a more robust financial management system.

Q:

Cloud-based services such as Intacct are becoming more widely used. Should an entrepreneur still be concerned about issues such as security and access? 

Security and accessibility are always things someone should consider when evaluating a financial system, regardless of where it is hosted. There is a general misconception that cloud systems are less secure than running software in-house. That just simply isn’t the case.

At Intacct, for example, we operate in redundant Fortune 100-class data centers, and we’ve built a specific set of operational characteristics into the system that help to ensure the highest levels of privacy, availability, integrity, and security for our customers.

Q:

Given that today’s accounting software systems are so powerful, what might alert a small business owner that it’s time to reassess/upgrade his/her accounting systems?

While there may be one or more big triggers, like adding in the complexity of having multiple entities, often it is a series of small nuisances that build over time. With many entry-level financial systems, companies spend a lot of time doing reporting from Excel or in supplementary software programs, which are error-prone and time-consuming.

Q:

Similarly, is there a point at which a small business should turn to an accounting professional, either in-house or as a contractor, rather than do it all themselves?

I think it is more of a matter of personal preference regarding the timing, and it will depend on the owner’s background. Some will opt to work with an accounting firm right at the outset, others will begin to build an in-house finance team, and still others will opt to leverage some combination of both.

Q:

What factors should a small business owner consider when hiring an accountant?

Key areas include skills, reputation, and fees. A Certified Public Accountant (CPA) has to pass exams from the American Institute of Certified Public Accountants (AICPA) and other state administered examinations. CPAs also typically go through continuing education classes to maintain their license. There are many ways to evaluate reputation, such as references or even Yelp reviews.

As for fees, accountants typically base them on the type of services, time and expertise required, and complexity of the work. Some charge strictly by the hour, while others offer a fixed fee by the month or by project.

Q:

Even the most powerful system won’t do much good if the data you give it is inaccurate or filled with mistakes. What are ways to ensure accurate inputs and minimize risk of errors?

Look at ways to automate processes, so you can eliminate duplicate data entry. For example, there are many areas in Intacct where you enter data once and then it self-populates other relevant areas in the system as needed. It is also helpful to have a system with strong audit trails so you can see when/where changes were made or how far back an entry goes. If you catch a mistake, it is easy to make adjustments in all areas it affects.

Q:

What are the key metrics a small business owner should pay the most attention to, and how often should these numbers be reviewed?

  • Bookings or Sales Results. Daily, weekly, or monthly new sales is the first indicator of the company’s health. Trending the information to do month-over-month or year-over-year analysis helps with understanding seasonality and the natural ups and downs a business could be moving through.
  • Pre-tax net profit margin. This metric is probably the most important, because it tells the owner how much profit you’re making from every dollar in sales. For private companies, it is usually expressed as net profit before taxes in a given financial period, divided by sales.
  • Current ratio. This is a fundamental liquidity ratio that gives you an idea of how well you can meet your obligations. Expressed as current assets divided by current liabilities, the current ratio basically shows whether the assets that you can convert into cash quickly (within a year) will cover what you must pay off soon (in less than a year). A ratio of less than one means you could run short of cash within the next year.
  • Quick ratio. Typically expressed as cash plus accounts receivable divided by current liabilities, this is another liquidity ratio that should be analyzed together with the current ratio. Watching your cash is critical; as the old saying goes, “Cash is King (or Queen).”
  • Accounts payable days and accounts receivable days. You may be paying your suppliers too quickly, which is money you could be investing in to your business, or you could find you are not receiving payments quickly enough from your customers. If you have a net 30 days for payment, but customers are paying you in 90 days, you could have a poor collections process, or you could have a product quality or shipment issue.
Q:

Similarly, are there sometimes overlooked accounting and financial trends or ratios that should be watched closely?

  • Compounding Numbers. The power of compounding revenue is straightforward, but still surprising. A company must focus on growth, and the faster the better, as the rate of growth makes a difference in the ability to compete and deliver industry-leading solutions or products. A focus on how to generate tremendous growth is paramount for strategy discussions and cash requirements.
  • Earning Power Ratio
     
    This ratio combines asset turnover with the net profit rate (see ratio above). Earning power can be increased by heavier trading on assets, by decreasing costs, by lowering the break-even point, or by increasing sales faster than the accompanying rise in costs.
  • Net Sales to Tangible Net Worth

    This ratio indicates whether your investment in the business is adequately proportionate to your sales volume. It may also uncover potential credit or management problems.
  • Customer Acquisition Costs. This helps you assess how much time is necessary to pay back a sales and marketing investment in a customer. You could track the average cost per customer for the appropriate time period—a month or a quarter—to see the trends of building the business.
Q:

How often should you review your small business’s financial information? Should some statistics be checked more frequently than others?

Most companies review their financials on a monthly, quarterly, and annual basis. With today’s cloud based financial management solutions providing real time information, you can and should be monitoring key performance indicators on a daily and weekly basis. With real time feedback, a company can spot opportunities to exploit business results, or minimize risk.

Q:

How can a small business benefit from regularly reviewing financial data with a SCORE small business mentor?

SCORE mentors can be a great resource for entrepreneurs considering starting a business. You can run ideas by someone who brings a slightly different perspective, and might identify opportunities and potential risks that hadn’t been considered. For existing small business owners, SCORE mentors can help with growth strategies and provide advice about business decisions. They are also a great resource for times when you need help in certain areas, like marketing or lead generation, that fall outside your strengths.

 

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About the Author

Robert Reid is CEO at Intacct, and served recently as president and CEO of LucidEra, a market leader for on-demand business intelligence. Prior to that, he was group vice president of industry-leading Siebel CRM On Demand for Oracle Corporation, managing the SMB sector. As president and CEO of on-demand CRM innovator UpShot, Reid grew the company tenfold before it was acquired by Siebel.

Reid served as president of Concur Commerce Network, an e-marketplace for small to mid-sized businesses, and also as president and CEO of Seeker Software. He was a vice president at Documentum, where he helped established the company as a world leader of document management software. Reid has also held executive management positions at Octel Communications, NBI, and Zenith Data Systems.