A CEO discusses the difference between accounting and bookkeeping and why it matters to your business.
In many circles within the small to mid-sized business atmosphere, the words accounting and bookkeeping are often used interchangeably. While they are certainly related, the difference between the two is meaningful and material. The most fundamental question that is often the driving delineator between the two is simply “why?”.
Why should a company have an accounting group or team versus a single bookkeeper? Bookkeepers create journal entries, understand debits and credits, reconcile bank accounts, and (hopefully) furnish basic financial statements. For some business owners, that will suffice. For many others the need to ensure that they have reliable, insurable records and actionable data to make good business decisions means an accounting group is needed. An accounting group goes beyond booking Zoom to ‘communications software expense’ and asks: Why did this expense increase by 8% from April to May? Why is our long-time customer suddenly delaying payment? Why did our payroll expenses remain flat month over month while our headcount decreased due to layoffs? Context is critical.
To have actionable, reliable, trustworthy data, there are key structural items that an accounting group should put in place and collaborate with management to thoroughly understand:
• Chart of Accounts – One of the most fundamental building blocks for any company’s financials is a chart of accounts, yet it is easily overlooked or taken for granted. An overly limited chart of accounts will leave an owner unsure of where they are spending money, or whether assets and liabilities are short or long-term in nature. An overly detailed chart of accounts can prove cumbersome, time intensive, and elongate the monthly close cycle.
• Departments – Some think of expenses in two main departments- Cost of Goods Sold and Operating Expenses. Depending on industry, going deeper into department delineations like Marketing, Sales, Research and Development, General and Administrative (G&A) are important to be able to calculate meaningful metrics and KPIs to help measure success. A few commonly used KPIs that may be inaccurate without departmental delineation include Gross Profit, Customer Acquisition Cost, and departmental expense as a percentage of revenue or total expenses. If accurate and consistent departmental coding/allocations are lacking, businesses will struggle with their decision-making processes around where to make hires and other investments in their growth journey.
• What data lives in what system(s) – An accounting group can help identify what systems can and should house your data such that your systems are scalable up to your next inflection point. By some estimates, there are upwards of 25 million businesses that use QuickBooks Online (QBO) as of Q1 2023. The reasons are clear – it is cost effective, easy to use, reliable, familiar to many, and the online versions have a myriad of integrations to leverage. This low price point comes with limitations that you must be familiar with and evaluate the impact of as your business scales. Multiple entities, foreign currencies, deferred revenue arrangements, and various reporting needs are lacking in QBO. An accounting group can help assess the importance (or lack thereof) of these deficiencies to your business and whether graduating to a Sage Intacct, NetSuite or other ERP might make sense or help determine when that should occur.
Beyond these structural items, there are a number of other focuses that can help assure the accuracy of a company’s books, such as: revenue recognition, for which the guidance and principles can vary greatly from industry to industry, most notably nuanced within the software/technology industry; cash vs accrual accounting; and the use of various technological tools to augment your ERP, with key examples including, but certainly far from limited to:
• BILL – Until recently known as bill.com, BILL automates much of the accounts payable process. Vendor coding, approval workflow, and payment methods of credit card, check, ACH or wire (including international), BILL has long been an affordable and effective way to optimize a company’s payables process.
• Floqast – Established in 2014, Floqast is a platform originally focused on the monthly close workflow, and has expanded to include additional analytics, auditor workflows, and more. At its core, Floqast was built to be the accounting team’s best friend, providing an API between Box or Google Drive and ERPs such as QBO, Sage Intacct, or NetSuite. These APIs allow for notifications when balance sheet accounts do not tie out to supporting subledgers and documentation. It also features checklist and review note capabilities, assigning preparers and reviewers due dates for all their monthly close items.
• Ramp– As a corporate credit card platform, Ramp can significantly streamline the monthly close cycle, eliminating the need for credit card accruals, manual journal entries or activity uploads, and automated coding/approvals/spend restrictions, and more. Ramp backs up their claims that they are the only credit card platform trying to encourage businesses to spend less, as they help identify areas for potential savings and can even assist with negotiations with certain providers.
• Avalara – Avalara provides a cloud-based sales tax platform to handle sales tax collection and reporting across all geographies. Sales tax compliance has always been a troublesome item for smaller companies to manage and often creates problems during a company sale process. The Wayfair ruling in 2018 opened a whole new assortment of problems for businesses that used to rely solely on the physical location of their offices and/or employees
to determine where they needed to collect and remit sales tax.
• Carta – Capitalization tables have long lived in Microsoft Excel. For companies keeping track of investors, employee shareholders, noteholders, and the associated compliance and reporting, Carta became a household name for managing this in a user-friendly platform.
• Centime – Some businesses are fortunate that collecting receivables is simple. For those less fortunate businesses, Centime is an affordable solution. Centime provides automated cash forecasting, collection notices, and easy customer payment options. A relatively new endeavor, Centime’s user interface and customer success team are meaningful differentiators.
• Salesforce – The dominant player in the CRM space for a reason, Salesforce has long been the go-to for tracking customer activity – contacts, accounts, opportunities at varying stages, pipeline reporting and analytics, conversion ratios and so much more. All these activities are housed in Salesforce’s CRM and are immensely important for evaluating the efficacy of sales, marketing, and product functions. Technology is great. However, without people and without documented processes for the various functions within the accounting team and month-end close cycle, you might find yourself with random number generator financial statements. Never underestimate the importance of documented accounting processes. They are crucial in areas such as training of new employees; audits; diligence; process improvement. A good accounting process or policy is clear, current, and accessible. A thorough process document does not do your business any good if nobody knows how to find it.
Another key consideration for ensuring accurate, reliable, and actionable financial books and records is the structure of the accounting team itself, and the segregation of duties within that accounting team. For businesses below a certain size, segregation of duties may not be feasible. A multi-person accounting team at a company with 10-15 people is not necessary or realistic. As your business grows, delineating between who pays vendors and employees, receives cash from customers, and reconciles your bank account(s) is a fundamental piece of internal controls that an accounting group will bring to your business. Another key internal control to consider in conjunction with a scaling organization may include expense approval thresholds at managerial tiers (I.e., department heads can approve up to XX, above that requires C-level approval).
So, what are the roles and responsibilities you can expect to see on an accounting team?
• Staff Accountant – Responsible for Accounts Payable, Accounts Receivable, monthly accruals/amortizations, bank account reconciliations, collections, and so on.
• Senior Accountant/Accounting Manager – Responsible for reviewing the work of the staff accountant, preparing ad hoc analysis and reporting, completing the more complex components of the close cycle – examples include intercompany accounting, revenue recognition, calculating commissions for sales personnel. Acts as a key driver in any review or audit processes.
• Controller – Owns the month-end close and reporting process end-to-end. Buck stops with them, meaning they should be able to spot anomalies in trends, be intimately familiar with the tasks, roles, strengths/weaknesses of each team member, and be the #1 asset for the CFO. The Controller should be a key part of evaluating systems and opportunities for process improvements.
• CFO/Director/VP of Finance – Owns the financial model, holds relationships with lenders and stakeholders, generates board level reporting, owns management discussion and analysis, and is the “no BS” member of the executive team that the CEO can count on for objective measurement and analytics.
There are many consideration for ensuring accurate, reliable, and actionable financial books and records. To learn more about accounting and bookkeeping services, contact us today.
Bart Davis
Co-Founder and CEO,
512Financial
www.512Financial.com
info@512Financial.com