The outbreak of the novel coronavirus and the shutdown that followed forced businesses to take a hard look at their business model. Even small and medium-sized business owners who made it through relatively unscathed are considering cost cutting measures. They’re looking at what they have, what they need, and what they need to do.
We spend a lot of time working with businesses in various stages of development. From the startup to the generational businesses, we’re hearing a lot of the same things from owners. They know they’re doing okay now, but they’re worried about the future.
Longtime business owners know that they need to think long term. They’re not just looking at next week or next month, but next year and three years after that.
Is it Time to Upsize or Downsize?
During times like these, it is tempting to think that cutting is the only solution. However, for some businesses, cutting costs can be more detrimental than helpful.
Before you decide to cut, make sure it’s the right business move. Look at the 1-year and 5-year plan for your business. Ask yourself some of the following questions:
- What awesome plans do you have in place to grow your business through and out of the recession?
- What will a strategic pivot or expansion require from your finance and accounting team?
- What core competencies are you missing from the team to support this growth?
- How will your new efforts rely on your finance and accounting team?
- Is there enough capacity on your current team to absorb new people quickly?
Examine these questions. If downsizing is going to hurt the growth of your business and impede your plans, then it may be the wrong solution.
What if I Need to Downsize?
If you’ve looked at these questions and still think downsizing is the right option, then it’s time to evaluate your business. The following are some of the most common mistakes we’ve seen small and medium-sized businesses make with their financial teams.
The Difference Between a Bookkeeper and a Controller
Most often we see business owners that don’t know the difference between a bookkeeper and a controller. Many small companies employ people with bookkeeper skills but give that person the title and salary of a controller.
What is a bookkeeper?
As Monster.com explains, “Bookkeepers oversee a company’s financial data and compliance by maintaining accurate books on accounts payable and receivable, payroll, and daily financial entries and reconciliations. They perform daily accounting tasks such as monthly financial reporting, general ledger entries, and record payments and adjustments.”
In other words, a bookkeeper is responsible for the day-to-day financial tasks a company may require.
What is a controller?
Conversely, a controller does much more high-level accounting work. According to Investopedia, “A controller is an individual who has responsibility for all accounting-related activities, including high-level accounting, managerial accounting, and finance activities, within a company. A financial controller typically reports to a firm’s chief financial officer (CFO); although these two positions may be combined in smaller businesses.”
In other words, a controller is closer to the CFO of your company than it is to the bookkeeper. A controller is responsible for helping prepare operating budgets and overseeing financial reporting. He or she can analyze financial data.
Are You Paying Your Bookkeeper Too Much?
When evaluating your company, examine the level of skill your “controller” has. If that person only has the skills of a bookkeeper, you’re paying too much. If you need more guidance, Robert Half and Associates (which normally places finance and accounting workers) publishes a great guidebook of salaries by title, function, and location.
As the employer, it’s your job to assess the skills of your people and make an honest appraisal of where they fit into your business based on those skills. Make a skills gap analysis to identify unmet needs.
Are your employees in the proper roles within your financial team? Are they getting paid the salary their skill demands and not what their title demands? Compare the skill sets of your current team to what you will need in the future.
You want to make sure you have the right employees in the right roles and that those employees have the room and ability to grow into larger roles in the future.
Cost Cutting by Utilizing Part-Time Roles
Many small companies that we work with are in a transitional stage. They are too small to require high-level employees like a controller but too big to go without them. Going without stops the growth of the business. We have seen a lot of companies hire a full-time controller and then have that person fill a hybrid controller-bookkeeper role. The person does high-level work like cash flow projections, but also work much below their level like writing checks and Quickbooks entries. They are paid at a controller’s salary.
Don’t make this mistake. When a high-level employee uses their time on menial tasks, important issues are often missed or pushed aside. On the finance side, you’re paying extra money for lower-level work.
There is a better option. Consider part-time roles. A part-time accounts payable employee would help free up your controller for higher level, higher value work. Meantime, a part-time controller or CFO can help with month-end closes and quarterly budgeting without the full-time pay.
If you’re worried that these guys don’t exist, don’t worry, they do. In fact, it’s a service that Towne Advisory offers all the time.
How Cost Cutting is Blocked by the “Trust Premium”
We also notice that small business owners reward loyalty or relationships much more than large corporations. Many small businesses we have worked with place a long-time employee or relative in a top leadership position because the owner trusts them. We call this the “Trust Premium”. Many times, this employee doesn’t have all the skills needed for the job, but the trust is worth more.
Paying a premium for your peace of mind makes sense to many small business owners, but often they’re not seeing the financial burden it puts on their company. If your long-time bookkeeper makes little mistakes because of a lack of skill, your CPA is the one to clean it up. That means you’re paying extra professional fees to clean up the work of your employee.
There’s also the worst-case scenario, one that doesn’t get talked about a lot because it’s an uncomfortable topic. With the right opportunity, environment, and motivation, even good people commit fraud. Because the person committing fraud is often trusted, it usually takes small business owners longer to recognize that it’s happening.
According to the Association of Certified Fraud Examiners (ACFE), fraud within a company lasts approximately 18 months before it is reported. Worse yet, a 2016 study by ACFE found small businesses suffered the same median fraud loss ($150,000) as companies with more than 10,000 employees. The ACFE says 87% of the people committing that fraud are first-time offenders.
It is okay to pay a “Trust Premium”, but if you do, also pay for an outside CFO to look at the books once a month. Reconciliations like this can relieve the pressure on an internal employee and give you better information. It will also reduce the risk of costly mistakes or even fraud.
Cost Cutting Through Geography
Do you live in an area that has a high cost of living? Does your team have to live in that same area? If parts of your team can work remotely, why shouldn’t they? In some cases, your financial team will perform just as well with a college grad living in Salt Lake City as it would with one living in Palo Alto.
What if you had accounts payable running out of Salt Lake City, your controller sitting in Wichita, but your CFO sitting down the hall? We’ve seen it work many, many times. Once only feasible for multinational corporations, outsourcing to other parts of the country is now an option for companies of all sizes.
Recent events have forced a taste of this on all companies, so why not try going all the way?
Accounting is unique in that it has its own language. That language can transcend an accent or a foreign language. Given the current economic state, there will be plenty of high-quality talent on the market. Do not disregard a potential employee simply because she lives 1,000 miles away or even 3,000 miles away.
Don’t Let Technology Be a Barrier to Finance & Accounting Savings
As you consider outsourcing, do not allow a lack of technology to become a barrier.
Finance and accounting pros know that it’s important to get the right information to the right people at the right time so decisions can be made. However, because that mission is so critical, we’re often slow to change. Many finance people operate in an “if it ain’t broke, don’t fix it” philosophy.
It’s time to change that way of thinking.
We live in an age of technological marvels that are relatively inexpensive and save a lot of time. Software like Bill.com speeds up your working capital inflow, while Expensify allows for automation of expense reimbursements. There’s file-sharing software like Google Docs and Egnyte and timekeeping software like TSheets and Harvest. There’s so much to choose from!
It may seem hard to justify spending an additional few hundred dollars per month on software licenses but think about the savings. What’s more? The $500 a month you’re spending on licenses or the $2,000 a month you’re saving because your accounts payable manager lives in Salt Lake City instead of Palo Alto?
Cost Cutting by Financing Your Lumpy Expenses
Many small business owners we meet hate payment plans. The idea of being indebted to anyone is scary. However, there are times when it makes sense.
Consider financing your lumpy expenses. Instead of writing your CPA a check for $3,000 every April, what would happen if you paid $250 per month? Monthly payments are often much easier to manage and they may be beneficial to you. A quick call here and there during the year won’t add to the overall bill but will get you better service throughout the year. Speaking from experience, most CPAs are really bad about billing those short phone calls! Just be clear what is in the scope of the arrangement to make sure you know what’s included and excluded from the deal.
Still Unsure?
If you’re still not sure of where to go or what the next steps for your business are, please feel free to reach out to us here at Towne Advisory. We’re always happy to talk through any questions you may have.