If you’ve never thought of your finance and accounting departments as profit centres, you are not alone. In my experience, most companies do not do a great job of planning for how their accounting functions will support their profitability instead of operating simply as overhead.
Most entrepreneurs do not start businesses because they are experts in finance and accounting. Entrepreneurs are the visionaries. They have a product or service that they are bringing to life. Rarely do they find themselves excited about the accounting part of the business. Sure, they want to be profitable, but how they manage the nuts and bolts is often foreign.
Here is a typical evolution of a start-up’s accounting functions. You will see that it is often driven by some internal or external need. It may look something like this:
Phase 1: The Business is Started
Things are in motion, and sales may or may not have been made. Bills need to be paid and money needs to be invoiced and collected from customers.
Phase 2: The Business Is Starting to Grow
Customers are acquired and the company must start looking at revenues and expenses beyond simply tracking payables and receivables.
Phase 3: Time for a Better Tracking Mechanism
QuickBooks is purchased and set up quickly, but maybe not correctly.
Phase 4: Tax Time!
The entrepreneur needs help and secures a CPA to file the company’s tax return. The CPA reviews QuickBooks and revises the chart of accounts to classify income and expenses in order to file tax returns.
Phase 5: The Business is Growing – Time to Expand
It is time to borrow money and the bank is looking for the company’s financial statements. That includes the Balance Sheet that you may not fully understand. Time for a bookkeeper!
Phase 6: The Business Continues to Grow – But Something is Out of Whack
Your part-time bookkeeper is expensive. More transactions equal more time equals more cost, and that fixed overhead cost is not contributing to revenue.
Phase 7: More Fixed Overhead?
As the business continues to grow, you add an additional bookkeeper, accounts payable, accounts receivable and possibly an inventory clerk.
Phase 8: Something is Missing
When fixed overhead contributes little if anything to your company’s profit, it is time to take a hard look at how you’ve set up your structure.
What if the finance and accounting departments were contributing to the profit of the business? What would that look like? Most transactions are processed in the accounting department. That is “information” that can be converted to “knowledge.”
Here’s how the picture looks when you are orchestrating an accounting profit centre:
- You receive regular, timely, and accurate financial statements with variances
- You are comfortable reading, analyzing and interpreting your financial statements, including all-important Statement of Cash Flows
- You are able to use your understanding of the financials to improve decision-making and validate previous decisions
- You are able to make adjustments in your business earlier because of this information
- You are getting your financial and operational Key Performance Indicators regularly
- You are receiving forecasted cash flow projections regularly
Most business owners can make better decisions for their company when:
- They have timely and accurate financial information
- They know what to expect from their accounting/finance department
- They leverage that timely information and turn it into knowledge
That is what shifts the accounting function into a profit centre. A profit centre works for you, helps you grow, and does not exist simply to track information the way unproductive overhead might.
Are you ready to turn your accounting overhead into a finance profit centre?