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The Finance Function for Small Business - P.I.T.A.



There are certain functions in the business world – no matter how large or small your company – that are simply unavoidable. You need customers to buy what you're selling, marketing to attract those customers, and accounting processes to keep track of the comings and goings of your earnings.

Alas, there's that dreaded word again. Accounting.

The finance function of small businesses tends to fall into one of two viewpoints: P.I.T.A. or Pièce de Résistance.

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For owners of very small companies, they often view their finance and accounting functions as the former. In other words, these elements are a huge PITA for SMBs who often feel as though accounting is simply a necessary compliance tool they're forced to maintain in order to do business.

As businesses grow and begin to generate  increased revenues, winning management teams understand that finance needs to move from PITA to Pièce de Résistance.

So, what's the difference?

Small Business Accounting - Survival Mode

Most small businesses look at accounting as a compliance tool that's essentially a cost of doing business. It's a compliance tool, which is also generally known as a necessary evil for owners who would prefer to focus on anything but the books.

In this state of mind, leaders are in survival mode. They're trying to spend as little on accounting as possible, taking care to dot the "I"s and cross the "T"s without looking for extra bells and whistles, which may seem even more overwhelming to the day-to-day functions of the business. Here, the old way of doing things is fine; all you need is a bookkeeper to punch in the numbers and generic software to take care of the calculations.

Think of it this way: Very small companies also have very few employees. Businesses that have seven or eight employees total can touch the whole company in a few footsteps. They're in survival mode. They just need to make sure that the payroll is met, invoices go out, bills get paid, and state and local taxes are accounted for.

At this lifecycle stage of their business, owners are often focused on basic functions such as accounts payable and receivable. Accounting is seen as an inescapable cost of doing business, and, frankly, it’s a PITA.

Small Business Accounting - From Survive to Thrive

Once a business exceeds $1 million in revenue, the mindset of the company's leaders should change. At this point, the business needs to move from survival mode – where accounting is a daunting task that can't be avoided – to thriving on the advantages that can be realized with financial intelligence – the Pièce de Résistance.

In this mindset, simple bookkeeping is no longer enough. Leaders need to access and understand true financial intelligence metrics so they can make better decisions. Data is the key, and data-driven accounting is the difference between surviving and thriving.

Once a business employs processes and technology to automatically capture data  as part of the finance and accounting function, decision makers will gain access to  actionable financial intelligence.

The Anatomy of the Finance Function

You can't escape numbers, so you might as well make them work for you. Ask yourself: Why are you in business in the first place? What's making you better than the competition? How can you take what you know right now to be a better company tomorrow?

These are key questions, but the answers may be harder to deliver than you might think. Once you delve into the data, financial intelligence will help you discover:

  • What's driving your success;
  • How you're doing against those success drivers;
  • Which key performance indicators (KPIs) are imperative for future strategies.

Using scorecards, data, and metrics, you'll be able to see a clear path, which lays out successes and opportunities.

Changing a CEO's View of the Finance Function

When accounting is a PITA, you simply want to do the bare minimum to make sure the job is done, and send it on its way. As you grow, this mindset won't be enough, and you'll find yourself wishing you had the tools to make better decisions for your business. When you have solid financial intelligence at your fingertips, you can better understand your  business drivers, focusing on actionable leading indicators vs. backwards looking financial reports like income statements and balance sheets.

Understanding Your KPIs

Bigger profits are driven from better decision-making processes. KPIs deliver imperative information so you can formulate a plan for success. Proper analytics help you decide where you should invest your money.

  • Are bigger clients more profitable for your firm than smaller clients? Or is the reverse true? If large clients are costing you a ton of money in terms of people and resources, you may not be making as much from them as you think. Conversely, if you have a ton of small clients, but they're all eating up your employees' time with questions and complications, it may be best to focus on larger, more self-sustaining clients. You won't really know until you look at the numbers.
  • When should you hire new employees? If there's a huge influx of work coming down the pipeline, you may need to bring on additional staff. Alternatively, if there are bottlenecks in the current processes that can be fixed with other remedies, it may not make financial sense to bring more people onto your payroll.
  • How can you improve your current offerings? KPIs will help you investigate deficiencies in your organization so you can put measures in place to produce process improvements. Does your sales team need more training? Should you invest in tools, such as a CRM, to facilitate relationship building?

Arming Yourself with Proper Analytics

When you're armed with the proper analytics, you'll be able to move profits from a company-wide level to specific profit and cost centers. It's important to be able to dissect profits from different angles. Financial intelligence will allow you to see how your teams are doing, which jobs are most profitable, and which customers are making you the most money. In doing so, profits will begin to drive the decisions you make.

Let's Look at an Example

Say you're operating an IT services firm.

  • Do you make more money with monthly recurring clients, one-off projects, or hosting services?
  • When you're ready to grow your business, do you know where you should send your sales reps?
  • Would it make monetary sense for you to sponsor conferences or industry events to gain exposure? Or would the costs outweigh the benefits?

Generic bookkeeping can't provide the answers to these questions, but as your organizations grows, so too will the risk associated with your decisions. It only makes sense to invest in finance and accounting systems that will help you analyze your KPIs so you can determine where your money is best spent.

Quality financial systems will help you streamline operations through automation, integration, and best practices, ensuring you're set up for financial success in the long run. In a nutshell, this is the difference between surviving and thriving in the SMB arena.

Outsourcing Your Finance Function

CPAPracticeAdvisor.com observes, "Outsourcing core functions such as accounting/finance...[is now seen]...as a smart and viable option to optimize business processes and ultimately improve the bottom line."

Some people still maintain the old way of thinking – that it's risky business to outsource. If you're of the belief that your accounting and finance functions need to remain part of your in-house operations, it's time to reevaluate your perception of risk. Outsourcing your finance functions can allow you to reap great rewards, particularly for companies with over $1 million in revenues.

Consider the following:

  • Internal Controls aren't Based on Trust. For many small businesses, in-house accounting systems are often dependent on a single person who's tasked with approving the bill, writing the check, and reconciling the bank account. These transactions are usually under lock and key, making the process susceptible to theft. Even honest people can succumb to temptation when there are no controls in place to prevent such occurrences.

Conversely, outsourcing eliminates a dependency on a single person.

  • Transparency. In-house accounting is usually inaccessible to anyone except the designated accountant. Often times, business owners don't even have the admin password, which means anything could be happening to the books behind closed doors.

Web-based applications have changed this, allowing full transparency and visibility into your accounting records whenever you need to access them. Be mindful, however, that not all outsourcing companies are created equal. Some outsourced firms won't give you access to your data, either. It's important to do your homework to ensure you choose a company that believes in transparency. At GrowthForce, we'll give you a username and password, and you're free to access your records anytime you choose. Our software has an audit trail, so if something is questionable down the line, we'll be able to tell you who made the changes and when they happened.

  • Increased Value. Outsourcing allows you to focus on your business and scale without being distracted by building and managing an internal accounting department. Additionally, the investment in top-of-the-line outsourcing means you'll have financial intelligence at your fingertips, allowing you to make better decisions and avoid costly mistakes.

Can your internal accounting team do that for you?

In business, strategy is everything. Sometimes, you have to change your outlook on your processes before you can move forward. When it comes to focusing on the finance function of your small business, a shift in mentality from PITA to Pièce de Résistance can mean the difference between status quo and amazing results that propel you towards greater success.

If you're ready to make the leap from reactive to proactive decision maker, download your free copy of GrowthForce's The CEO's Guide to Keeping Score.

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