It’s likely you started your business because you are good at something. Maybe you’re a great mechanic. Or you know how to make a great meal. Or you can design and manufacture a product like nobody else can. You identified a hole in a market and filled it with your expertise, energy and passion.
It’s unlikely you started your business because you love accounting (unless you are, in fact, an accountant!). You didn’t start your business so you could track expenses, file government forms, stay on top of taxes or because you cherish the differences between debits and credits. And, if you’re like most business owners, these critical tasks are the least favorite parts of your job. As a result, maybe you don’t give them the attention they need, both because you don’t really like doing them and because they can be complicated and confusing.
The good news is you yourself don’t have to be a financial expert at small business financing. You just have to be an expert at making sure they get done properly by someone who is. A little knowledge about how they work and why they matter will make you more confident when it comes to your small business financial management.
Right from the Start
The kind of business you own determines what kind of legal entity you create to manage your business finance. For many small businesses, a Limited Liability Company legal designation is the easiest and best structure. It gives you a totally separate designation for your business operations that is clear and distinct from your personal finances and dealings. Other businesses are better suited for Incorporation (S-Corp, C-Corp, etc.). These types of structures are ideal if you have a more complicated business, for example, one with many employees or long-term contracts or inventory. Your legal and financial advisor(s) can tell you which is best for your situation. But this is a critical decision, as it defines how your financial structure should be set up to reflect how your business operates as well as to meet the federal, state and local regulatory and tax obligations for your business.
Understanding the Basics
Even if you’re not a “numbers person,” a good working knowledge of the principles of accounting will help you better understand how to track and interpret the thousands of financial transactions your small business will create each year. Whether you use a simple online bookkeeping software or you have a team of a dozen financial analysts, it is critical that you understand the implications of what the software or the analysts are reporting and the business decisions you can make to impact those reports. You can easily deepen your small business financial skills through classes at a local community college, by attending seminars or workshops, or even through online courses such as this popular MOOC on Coursera: Introduction to Financial Accounting Again, you don’t have to become an expert. But building a solid foundation in the basics will give you an enormous amount of confidence when it comes to understanding the financial side of your business.
When To Bring in the Experts
I get lots of questions from small business owners just like you about financial help for a small business. The biggest one is usually “how big does my business need to be before I should think about working with or hiring an accountant?”
The truth is, your business’ complexity determines that, not its size. If you have a simple business – whether large or small – that has very straightforward financial transactions, then you likely don’t need the ongoing services of an accountant, though monthly or quarterly and certainly annual reviews with one are incredibly useful. Just keep in mind that even though you may be fine using an online bookkeeping solution, that solution is only as good as the data that goes into it. Using a bookkeeper to manage that process is a great idea, if for no other reason than to have a different set of eyes on your small business financials.
But if your business has a number of employees and you run a payroll for them, then that’s a level of complexity that triggers a need for deeper financial help. The same is true if your business collects sales taxes, maintains inventory, or has complex payment terms and/or long-term contracts with your customers. Every level of complexity adds a new dimension to the type of financial accounting and analysis you need, not only to understand how your business is performing but also to remain compliant with the ever-changing rules, filings, laws, and regulations that may apply.
Bookkeeper vs. CPA
Many businesses can benefit from using a bookkeeper and a CPA (certified public accountant) in tandem. A bookkeeper is great for handling day-to-day transactions, accounts receivable and payables, even employee payroll and monthly reconciliation. CPA’s, who go through more rigorous training and testing to obtain their license, benefit your company when you have more complex financials to execute, such as yearly taxes returns or want to apply for a loan to expand your business or need assistance with tax accounting.
Data vs. Knowledge
Tracking financial transactions – whether through an online tool or through an accountant – is critical in helping you see how money flows through your business. But just like the final score of a football game doesn’t tell you everything that went on, a list of financial transactions is just that: a tally of where money went. That’s great data.
But buried in that data is the true knowledge you need to make better business decisions. Pouring over the minutia of that data will give you insights that a simple list of numbers can never provide. Are sales trending up or down? Why are overhead costs higher this month than last? In which quarter will sales tax rates change and how will that impact profitability? What is our true breakeven number each month? Why does there seem to be a lot of revenue but rarely any profit?
This is when partnering with a financial advisor makes sense. They can analyze your financial performance and translate that into actionable recommendations that will impact your business and its results.
Tips for Choosing a Financial Advisor
Picking a financial advisor is similar to choosing any other type of business partner. Ideally, good financial advisors have:
•References from trusted sources: these references can be people you know or do business with who have worked with this advisor before. Having someone you trust recommend someone they trust is a powerful endorsement.
•Reasonable experience with businesses/industries just like yours: some familiarity with a business like yours helps to make the learning curve shorter and gives you confidence that they’ve run into the types of situations your business encounters. Some advisors specialize in certain types of businesses (service businesses, family businesses, or manufacturing companies) or certain industries (energy, healthcare, retail, or quick-serve restaurants).
•Chemistry and trust: ultimately, people do business with people they like and trust. References and experience are important, but the hallmark of a successful business relationship always comes down to simply working well together and feeling like someone is looking out for your best interests.
I’m a numbers guy. I have been all my life. And I completely understand that most people are not. But don’t let that be the reason why you don’t take a deeper interest in the financial workings of your business. You don’t have to be a financial expert. You just have to be comfortable admitting that you aren’t and then bringing in a resource who is.
Written by Paul Bruce
Executive Vice President, Chief Financial Officer and Treasurer, Union Savings Bank