The Outsourced CFO: Part 2 - Know Every Detail of Your Expenses
Why Having an Outsourced CFO Increases your Chances of Being Successful
An Entrepreneurs Guide to Financial Responsibility
Part 2: Know Every Detail of Your Expenses
In Part 1 of our series An Entrepreneur’s Guide to Financial Responsibility, we discussed why it’s important for start-up enterprises to get a handle on their cash flow. Without understanding the financial big picture, new businesses are in danger of finding themselves out of money. Obviously, that’s a crisis scenario that entrepreneurs want to avoid at all costs.
Therefore, we bring you Part 2 in our series: Know Every Detail of Your Expenses. We’ll show you why knowing your expenses down to the penny is vital and how you can accomplish that to give your new venture the greatest chance for success.
Why Detailed Expenses Matter
Before getting into the nuts and bolts of the different expense categories you need to examine, let’s talk about why drilling down your expenses matters so much.
Of course, expenses are one important aspect of your business metrics. Once you read Part 1 of this series of articles, you should understand that knowing your expenses helps you stay on target for your projected burn rate for your cash runway. In short, you need to know what you’re spending each month so you know how long you can keep your doors open until the next influx of cash, from whatever source.
If that all makes your eyes glaze over, picture this scenario. Tomorrow you have a last-minute important meeting with a potential investor who wants detailed, up-to-date information about your financials. You have a marketing person, a receptionist, two salespeople, and two consultants… but no accounting staff yet. Who has time for that?
So, after working a 12-hour day, you sit in front of your computer trying to piece together the information you need for tomorrow’s meeting. You have a report from a few months ago, but what has happened since then?
Your checkbook is a mess, you’re missing bank statements, and well, frankly it’s a miracle everyone is even getting paid on time, let alone that you have the kind of report you need for investors. Heck, you’re not even sure what to include in the report or where a chunk of your cash went.
What Comprises Your Business’s Expenses
To understand what you need to put in the report described above, you need to know what makes up all the moving pieces of your company’s expenses. Even elements that aren’t technically expenses, like your pricing and accounts receivable, contribute to that column because of the way businesses run.
Accounts payable is obviously a big portion of your start-up’s expenses. You need to be keeping track of, at minimum, the following:
Company credit cards: who is using them, are there limits or a budget, who signs off on their use, and when do they need to be paid?
Expense reports: what are employees paying out of pocket that needs to be reimbursed? Where are the documents for company expenses? How often are reports submitted (monthly?), when are they paid out and who okays them?
Bills: what bills do you pay regularly every month, like rent and utilities? Are they on autopay plans? Is someone making sure they are paid on time?
Consulting fees: do you have outside consultants helping you with lead generation, website construction, or sales? How and when are they paid?
One-off expenses: these are expenses like new computers or office furniture. One-offs can also include some services, like someone who paints the new office space or hooks up your phone system. Who okays them? How are they paid (financed, on credit card, cash)?
Another huge part of your company expenses is your payroll. Are you waiting until the day everyone needs to be compensated and frantically writing checks, or do you have a payroll service? Who manages taxes? What about bonuses or commission?
If you have lines of credit, you need someone to stay on top of them. How much of your available credit has been used and how much remains? When are payments due? Where is all the documentation for the loan?
Are you doing all the banking for your business? Banking includes deposits, transfers, cash withdrawals, and all other actions. Have you already bounced a check because you forgot to make a deposit or transfer when you got too busy?
Cash on Hand/Liquidity
How much cash is in your petty cash right this minute? Any idea? How about in your checking account? Do you know how much of your business’s money you should keep available versus how much to invest?
If you’ve invested venture capital, are you keeping track of your dividends? Are you growing the equity in your business? Are you following the markets to see if you need to make changes to your investment portfolio? If you needed to liquidate assets, do you know how to do it and how long it would take?
Pricing of Services or Goods
The pricing of your goods or services needs to cover your cash outflow and then some. Otherwise, you’re either just scraping by, or even losing money, when the goal is to make a profit.
You need someone to review your pricing structure periodically to ensure it’s covering your expenses. If income is falling short, you need to either raise your rates or reduce your expenses (or both).
“Wait a minute,” you say, “accounts receivable aren’t part of my expenses.” But they are if the money coming into your business isn’t there when you need it for a payment. You need your accounts receivable paid fast so you’re not wasting time chasing down invoices and so you can use or invest that money yourself.
A knowledgeable accounts receivable person knows how to get invoices paid on time and can explore options for slow payers, such as using a collection agency or even factoring (having someone buy your accounts receivable at a discount in return for a lump sum payment).
Taxes and Documentation
In addition to those associated with payroll, what other taxes need to be paid? Who is taking care of it? Do you have all the documentation filed in a meticulous manner? Are you maximizing your deductions and making sure you’re not overpaying the IRS?
Audits and Reports
When it comes time for audits and reports, who is responsible for arranging and conducting them? Is this another herculean task to fall on your already overcrowded schedule? Most likely, the answer is yes.
A Solution to Your Problem
Are you feeling exhausted and overwhelmed just looking at the list above? Fear not, lucky for you there’s Scrubbed. We can function as an outsourced CFO for you, including handling all the aspects of your expenses, whether you need us for a few months, a year, or several years.
Scrubbed provides turnkey business solutions that are as unique as the businesses we help, including:
Accounting and financial reporting
Inventory management support
White label accounting
Audit and professional services
Tax preparation and filing
Corporate finance services
You can stop working 18-hour days and know that your expenses are being carefully monitored by professionals with your input only when it’s absolutely needed. You get to spend your time on what led you to establish your business and sleep better at night.
For a free consultation about how Scrubbed can help your business, get in touch today. Don’t wait until your business is in trouble to manage the fine details of your expenses.
About The Authors
Aira’s financial advisory expertise includes financial forecasting and modeling, financial due diligence, buy-side/sell-side support, drafting of business plans, and creating key performance indicator dashboards. Her risk management expertise includes corporate governance, internal audit, forensic accounting and enterprise risk management.
Fred has extensive experience in financial planning and analysis both in the Philippines and in the US. He has led and participated in budget and forecast cycles of both subsidiary and consolidated financials of different multinationals. He was also heavily involved in monthly variance analysis, long-range planning, and reporting.