As I reflect on my first year of serving small business owners, one consistent theme I have learned is a good accountant is an asset to the value of the business! Many business owners are not good accountants and they often do not like to spend the money on accounting or administration as they don’t believe it is valuable to the business. As I work with these owners, they learn quickly the power of good accounting. Effective and timely representation of the economics of the business and of business transactions has an enormous impact on decision making, profitability and business valuation which is a derivative of profitability. Also, good accounting means good internal controls to make sure revenue and billing is being maximized, cost of revenue is being rationalized and operating expenses are being efficiently leveraged. Good accounting provides high levels of internal controls and no cash/profit leakage from your top or bottom lines.
Making smart choices for general ledger accounts
I met a business owner that was not having good luck selling his business despite having consistent growth and good margins. As I pealed the onion and dug into the revenues, I found equipment sales, installation services, consulting services, maintenance services and parts sales all commingled in the same ledger account. The problem with the commingling of these revenue streams is that they are all valued differently by the outside world, ie, banks, investors and potential buyers. For example, recurring revenue has a greater value then one-time revenue. However, one-time revenue can be the seed to obtaining more recurring revenue. Also, having a portfolio of revenue streams can help your firm be more valuable/sticky to your customer and in turn more valuable to the outside world. The other big difference in revenue streams can be the associated cost of sale or delivery and resulting margins. Making sure the correct cost of each revenue stream is aggregated and mapped to the right revenue accounts on the P&Ls is imperative for effective decision making and maximizing profitability and ultimately the value of the firm.
Accounting for the details of the contract/engagement
I am thinking of those hard-working owner operators that execute great business deals only to find out later the engagement was not billed timely, that certain revenue streams were not recorded properly, or worse yet, missed entirely. If the related costs are not properly captured, categorized and matched to the revenue, then you cannot get a good measurement of profitability. This adversely effects the firms’ profitability and enterprise value. Good accounting discipline ensures transactions are recorded from beginning to end on a timely accurate basis from estimation/quote to sales order, purchase orders, receiving, billing, collections and the payment of vendor/delivery.
A common theme I see in small business is that often times owner operator entrepreneurs do not have an adequate appreciation of the role of strong accounting/administrative infrastructure can have on the profitability, cash flow and valuation of the business. This area of the business is often underfunded and as such experience relatively high turnover.
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If your business should need experience in helping with your critical accounting functions and strategic financial advisory services, CFO4Growth is ready to assist.