How Basic Bookkeeping Gets Transformed into Management Accounting as Business Expands?

March 25, 2020

Many entrepreneuers don't understand the unique demands of managing finances for a startup. Learn how basic bookkeeping can evolve to an effective management accounting strategy.

When they start a business, only a few entrepreneurs realize that the management of finances in the startup phase is entirely different from managing finances for a growing or established business. The percentage of startups that fail in their first few years is over 50%.

Provided the fact that many factors can lead to a downturn of business, mismanagement of accounting is a major factor that governs the graph of business growth. Every business stage has a unique set of financial challenges that a company has to deal with and overcome. So, if you are getting started or hitting a 10-year mark, here are some suggestions for you to handle your accounting as your business goes through various stages.

Survive the Startup Stage

At the initial stage of starting a business, you have multiple roles to play as your biggest concern is survival, and the primary focus is proving that you have a viable business model. At this stage, you may not generate enough profit even to take a salary. 

During this phase, it is advised that you minimize the money spent on your accounting and bookkeeping, ensuring that the basics are done. You need to pay bills, process payroll, and make deposits. Depending on your circumstances, you can do it yourself or take a trusted partner’s help. You can also hire someone who can do your books for you at a very low cost. This can be the right solution until you reach a point where you need a more detailed level of reporting and accounting management.

When you have minimal funds at hand and you are wearing multiple hats, it is only wise to manage everything accordingly. As your cash flow and profits increase, you can start to think about taking more off your plate. Here, you will see the advantage of paying someone else to do your accounting as you will have more time to pay attention to your core business activities and growth.

Unless you have investors that require advanced reporting, in the early stage of your business, you should get your bookkeeping done as cheaply as possible while ensuring compliance.

Lean Into the Growth Stage

If you have made it to five years, congratulations. Only about half of the small businesses make it to five years. Your business is now in the establishment and growth stage. By this stage, you probably have a reliable cash flow, and your income is somewhat consistent.

stages of company growth

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By now, you can use a good accountant that can help you in analyzing the pros and cons of purchasing versus financing or leasing the property and equipment. Make sure you have an accountant who is not only focused on compliance (filing tax returns), but also on being a strategic partner in your business. Accountants provide clarity to your overall business operations. Going through business growth with an accountant by your side helps you make better business decisions.

Now is the time to discuss minimizing tax liabilities, tracking KPIs, and maximizing tax benefits if you are not already doing this. 

Another challenge that you can face in this stage is coping up with increasing demands on your time and resources if you have not started outsourcing non-primary business activities and hired employees. Look for people with complementary skill sets whether you are hiring or outsourcing, as broad range of strengths and talents manifests business growth.

Embrace the Expansion Stage

When instead of using your gut instinct, you start making spending decisions based on financial intelligence, you have travelled your way from the survival mode to the expansion stage. Now, sales are not the only thing that you are focused on and your growth happens because you monitor results from each area of your business based on the data.

embrace the expansion stage

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You have to be in-tune with what makes your business grow, and your decisions will be based on the KPIs (Key Performance Indicators) that drive your business. Borrowing may seem tempting for expansion and financial growth, but it is important to keep in mind that too much debt can strangle your business. Hence, managing debt is crucial during this phase. Keep a check on your company’s debt-to-equity ratio (long-term debt divided by equity). Lower ratios indicate that you are doing well when it comes to handling your debts.

During the expansion stage, your business needs more financial intelligence as it scales. It is advised to either set up a dedicated, multi-person accounting department or outsource to a premier accounting services provider.

Consider the Benefits of Outsourcing

Today, businesses, both large and small, are seeing outsourcing as a solution primarily for the accounting tasks. Outsourcing gives you the opportunity to receive accounting support from talented and experienced professionals without any overhead costs related to the in-house resources.

By providing bookkeeping and accounting services, outsourcing allows a business owner to concentrate on revenue-generating activities and business growth while it takes the non-core activities off the plate. Hence, the biggest advantage of outsourcing for a business is freeing up both brains and brawn.

When you have a team of experts at hand, you can rest assured that the accounting responsibilities will be completed on time. This streamlines the accounting tasks to produce high-quality results. Any suspicious activity can also be immediately reported to the owner hence reducing the probability of fraud or government penalties.

Transform Your Company’s Bookkeeping

In your business journey, every stage will bring new and pre-existing challenges. You should be flexible and always ready to adjust your business plans and operations accordingly as methods that worked at one stage may not be as effective for another. It is advised to manage your business finances efficiently at the earlier stage itself as it can prove to be a groundwork for your future success.