A company has a good accounting system, but the CEO is concerned that they are
not making the best use of metrics to drive the business. He senses a lack of
shared understanding of key metrics and goals. He senses the appearance of
financial disarray, despite his clear grasp of the business. Do you have
control of the numbers?
from the CEOs:
A good accounting system may be in place, but if it is not being used to drive the business and monitor the achievement of milestones then the company is not gaining the best advantage from it.
If there is a sense of financial disarray, this suggests that the company lacks financial metrics. Employees and managers may be doing their jobs, but without financial metrics it is difficult to tell how well they are doing their jobs.
Start with basic metrics:
Where are sales coming from?
What is the profitability of sales by customer segment and product line?
What is the company’s profitability?
What are the profitability trends of the company and key segments of the business?
Once a company is tracking these metrics, it is easier to focus managers and employees on products, product development, operations, sales and marketing issues that are most essential to the company’s success.
The company needs the equivalent of a CFO. This means a financial person, not an accountant. An individual who knows how to look at the numbers. A CFO will help the company to
See the strategic trends in the business,
Uncover the best opportunities for growth, and
Understand the greatest potential threats to growth of the business.
Situation: A software service company wants to expand operations. Their business model is to build clone offices that operate like the home office in new markets, much like a franchise operation. The founder CEO is struggling to identify key managers who can manage remote offices. How do you identify key managers?
Advice from the CEOs:
The key managers must be individuals who are business savvy, not talented engineers. The key managers must understand:
Management – with a proven management record;
Recruiting and hiring;
How to manage an office;
A bonus will be experience in a similar field, but this experience does not substitute for the above four critical requirements.
Looking at current employees, is there the bandwidth within the current team to help bootstrap new remote offices?
For example, is there a key senior manager who can become Director of Franchise Operations? In this role, the DFO will serve as a resource to the individuals opening new offices.
As this individual’s focus switches, an important question will be who replaces this individual in their current role?
It will be beneficial if the individuals who are chosen to lead new offices have at least some experience in sales. This will help to quickly build new customer bases for the remote sites. However, a new site manager must have balanced experience. While sales will be part of the responsibility these individuals must also be able to build and oversee the other critical functions necessary to build viable remote sites.
Situation: A company is concerned about increased energy expense as prices rise, and the impact on the bottom line. Pricing in their market is competitive. What’s the best way to recover these costs? Can you pass higher expenses on to customers?
Advice from the CEOs:
Businesses regularly pass on their increased gas and transportation costs to both commercial and retail customers as these costs rise.
This isn’t just true for gas and transportation expenses. As other expenses rise, companies regularly increase their pricing to account for increased costs.
Is it necessary to send out an announcement letter about the company’s intent to do this?
Some companies do. Others just start adding a line with a gas surcharge to their invoices. This is happening frequently enough so that most customers just pay it without question.
What do you do if someone objects?
If a customer objects, you always have the option to credit them the charge.
Again, most customers are so accustomed to seeing and tolerating these costs that they don’t object.
Look at the company accounting system. Are costs and performance trackable by business segment? Performance numbers show both the impact and magnitude of energy cost and improve the ability to manage the business.
If the talent is not present to either improve the current accounting system or to shift to better software, bring in part time accounting help. A good source is Robert Half International/AccountTemps. The cost of adjusting the current system will be recovered as the company gains more control over expenses by segment.
Situation: A company has been using the accrual method of accounting. As they approach the fourth quarter of the year, they are looking at project-based accounting to reduce year-end cash reserves and taxable income. How do you create and manage a project-based accounting system?
Advice from the CEOs:
The PeopleSoft Division of Oracle offers a project-based accounting package. There are a several issues that accompany a shift to project-based accounting: do employees work on more than one project, how do you plan to account for shared services such as administration and Human Resources, and do you plan to share revenue and costs across projects? These can entail a fundamental change in how the company is organized and behaves. If your primary motive is tax avoidance rather than organizational change, why would you pursue this level of change in the organization?
Looking at hundreds of companies with which the CEOs in the group have worked, nobody has seen any that utilize project-based accounting.
The company’s objective is to better understand the various projects that the company manages, and to have revenue travel with cost. A far simpler option from an accounting standpoint is to look for ways to pre-pay future expenses and thus reduce year-end cash reserves.
Another option is a hybrid between cash and accrual accounting.
If you have a strategic reason to pursue project-based accounting, look at firms that serve the construction and entertainment industries. These industries have similar challenges to those faced by the company.
Situation: A company’s accountant advises them to transition from a C Corporation to an S Corporation. Remaining a C Corp would force them into accrual accounting with significant tax consequences. The accountant also advises that it is easier to sell an S Corp to a buyer, and S Corp status would relieve problems with retained earnings. Which do you think is preferable, C or S Corp status?
Advice from the CEOs:
Accountants disagree. Get a second opinion. Also consult a tax or corporate lawyer who will provide another perspective.
Another company looked at S vs. C status and found two key factors:
S Corp status is great if you expect to lose money for a few years because of the benefit that it can offer to personal taxes. Over the long-term you should look at the difference between personal and corporate tax rates and set your strategy so that it makes the most sense.
An S Corp cannot have non-U.S. shareholders.
There is more flexibility with C Corp status in your ability to grant options, sell shares, etc. For a suitor, purchase of C Corp shares prior to a full acquisition is like a date before deciding on marriage.
C Corp status is good if you are building an empire. S Corp status is better if want to have employee ownership under an ESOP as an option for exit.
Since taxes are a significant part of this decision, think carefully before you shift from cash accounting.
Once you commit to accrual accounting you can’t go back to cash basis.
To the extent have an accrued tax liability you can extend payment of this liability over multiple years.
You also may want to consider a hybrid accounting method:
Accrual for sales
Cash for service
Look at whether there are tax advantages to a hybrid model.
Situation: A small company wants to reduce costs by consolidating accounting and operational communications between remote divisions, with home office coordination. Can you more effectively reduce costs by consolidating services or is it better to set up parallel but complimentary accounting and operational communications in each division?
Advice from the CEOs:
There are a number of things that need to be considered, including:
Whether the existing legacy system is off the shelf with modifications or was custom designed for your operation.
Does the current system meet your needs, and do operators understand it? Is operational understanding diffuse or can only one or two people operate it?
How similar are the divisions in terms of product, customers and operations?
Do divisions serve distinct, non-overlapping customers with different product lines?
Are there important operational differences, for example are some divisions union, and others non-union?
On an ongoing basis, except for accounting, do divisions function as complimentary or distinctly separate businesses?
How complex are the product and pricing offerings? Could you consider a simple solution like QuickBooks or are there are complexities to your business model and accounting that the off-the shelf or web-based systems can’t address?
How much historical data from your current system is needed to support ongoing and future operations?
The simplest solution may be to run your current system off of a server, with multiple nodes connected to the system – a direct connection at your home office, and point-to-point lines connecting your remote offices. This will solve both your data transfer and communications needs.
Hire a computer consultant to set this up and assist you in establishing a link. It will cost some money, but will save you time and money in the long-run.
If you decide to change your accounting system, do so at the end of your current fiscal year. Trying to change accounting systems in the midst of a fiscal year creates an accounting nightmare for a small business.
Situation: A small company has a long term clerk employee. This individual is responsible for AR/AP, Payroll and also HR manuals and reports to the CEO. This individual has been a good employee, but doesn’t perform well in this role. How would you structure accounting and bookkeeping in a small company?
Advice from the CEOs:
This is a key role, but there are a number of options. One is for the individual to continue reporting to the CEO, but train someone else to back them up. This will enable you to either shift the individual to another, more appropriate role within the company, or to continue with minimal disruption if the individual leaves.
Because of history and loyalty, this is a difficult emotional issue for you as CEO. It is important to consider what you would do if you could remove your emotions from the issue. If the answer is that you would eliminate the clerk position and hire a qualified, experienced bookkeeper at the appropriate salary, then this is your answer.
Packard’s Law – from one of HP’s founders – is that no company can grow beyond the capabilities of their employees. Hire the right person. This individual must be process-oriented – someone who routinely checks their own work to make sure that it is right. There is an adage in accounting that good accounting is 20% knowledge and 80% double checking the work. Hire a person who loves to do this.
Take care of this position in the best interests of the company, and look for another, more appropriate within the company job for the clerk.
Situation: A company has used the same accounting system for over 10 years. The current system produces information quickly and easily, and empowers management and sales to make good decisions. However, it doesn’t respond to customer information requests as well as newer packages. What are best practices for updating your accounting system without losing data?
Advice from the CEOs:
One option is to keep your legacy system, but migrate to a user-friendly platform designed to work with a CRM system that can better meet customers’ needs.
Keep both systems up live until you no longer need the old system, except as an archive of your historic data.
Be sure to cross-train other employees so that your current system doesn’t become worthless if your key administrator gets hit by a truck.
Before you decide which direction to pursue, ask what your employees like the current system.
What do they find most useful?
What accounting features do you need to support your growth plans?
What key functions of the current system would you have to emulate?
How expensive is it to maintain your current system?
Is your business so unique that no off the shelf alternatives exist?
Could you adopt an 80-90% solution and customize the rest?
It may be difficult to do this on your own. Look for a consultant with a background in accounting applications to analyze your needs.
If you feel that you must make a change, but are not ready to do so, develop your solution gradually.