I find it interesting that in more than half of the engagements I enter into, there is a discussion of replacing the company CPA in the initial interview. This percentage goes up dramatically if the company is seriously struggling.
The source of frustration is nearly always the same. Clients feel their accountant is not giving them the help they need to run their businesses. Maybe they are in some sort of trouble with the IRS, or workman's comp. They can't understand why they are profitable but they have no cash. Perhaps they are not sure where to invest in their business, or the bank has turned them down for a loan. Most CPAs will be short on good advice about these sorts of topics. It is not their fault. In fact, it is not their job.
CPAs, accountants, and bookkeepers practice what some call Compliance Accounting. This means that they are charged with making your books comply with government rules and regulations, and one of the various sets of rules that accountants have set up for themselves to standardize what books are supposed to look like. In addition, they are generally looking in the rearview mirror, making sense of what you have already done.
Note that increasing profits or efficiency, better using your assets, helping your cash flow, and making your business “bankable” did not make it on this list. That is because that is the owner's job.
Many business owners need to learn and use what some call Managerial Accounting. This involves using your financials to run your business in real time. This consists in making sure your financial reporting is able to tell you what you need to know, and then learning how to use it. Below are some key terms in which you need to be fluent to keep on top of your business finances.
Breakeven
No matter what size, each business has a fixed amount of money going out even if there are no sales at all. These are your fixed costs. These also include your loan payments. Did you know that your loan payments don't show up on your P&L? We are all working for free every day each month until we pay those bills. Do you know what day each month you stop paying everyone else and start paying yourself?
Profit Margins
How do you set your pricing? It should be based on your profit margin. That margin should be based on your breakeven. If your pricing is not competitive at that margin, you need to know why. Are your costs too high? Or is the value your customers perceive too low? You need to know this in real terms. There is no room for opinion.
Cash Flow vs. Profit
Cash Flow and Profit are not terms that can be used interchangeably. You can show a profit on your business but go under because of how you manage your cash flow. You need to know not just what is in your bank account but when cash is coming in and when it goes out. Profit is a good indicator of the health of your business. Cash determines if it lives or dies.
Can you afford the note on that new piece of equipment? What do you need to do to your profit to make sure you can? This question is not a place for an opinion or gut feeling.
There is nothing unfathomable about your business finances. All business owners have had to learn much more complicated things to do what they do. I will be going into detail about each of these terms in future posts. If you would like to learn more now. Contact us at 760-519-2230 or email me at tdannemiller@tagwyo.com
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