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Three Reasons to Outsource Payroll

Three Reasons to Outsource Payroll

Three Reasons to Outsource Payroll

When is the best time to outsource any or all of the various pieces that make up the payroll process? Since each company is unique, the answer to that question will vary, but there are some general guidelines that a business owner can follow to make that determination. In the context of this article, when we refer to “payroll” we are including the logistical payroll process itself, legal requirements for withholding and remitting certain amounts from compensation, as well as the various other deductions handled through the payroll process. payroll does not include various human resources matters that are directly connected to the payroll process, even though the two functions are closely related. Outsourcing payroll involves hiring an independent third party to perform some or all of the steps necessary for completion of the payroll process.

Payroll is a basic business process that involves several types of inputs, the organization, filtering, and accumulation of those inputs, and then the creation of several types of outputs. For the process to operate efficiently and effectively, it requires confidentiality, consistency, and compliance, as well as other quality related factors. Each of these factors can influence the decision regarding when outsourcing is appropriate.

Confidentiality

Above all else, the payroll process (as well as other HR matters) must be performed with strict confidentiality. Information regarding an employee-employer relationship is very sensitive, and the inappropriate disclosure of such confidential information can cause unnecessary disruption within a company. There are also legal implications that come from the disclosure of confidential information, so the process must be handled carefully. In most owner-managed businesses, because of the risks involved, the owner or a very trusted employee must take on most of the duties involved in the payroll process.

Consistency

Since payroll is a very routine process that must be performed in the same order at the same time during every payroll cycle, the person (or persons) doing payroll must be able to schedule their time accordingly. Due to the confidentiality issues mentioned above, this generally puts the owner (or his designee) in the position of having to block out certain time periods, creating constraints on their ability to be involved with other facets of the business.

Compliance

Since you, as an employer, are required to withhold and remit payroll taxes at the federal, state, and various local levels, administering those tax requirements can be a significant part of the payroll process. The administration functions include gathering, managing, and reporting the information, as well as paying the appropriate taxes. The payment timing requirements and amounts vary by tax type, so the time required to manage the entire process can be fairly significant.

Many employers also offer a benefits package and/or a retirement plan that involve employee participation and are commonly handled through a payroll deduction process.

Similar to the various types of payroll taxes, the administration of these programs includes gathering, managing, reporting the information, and paying the various amounts to the various providers, and again, the time commitment required can be a significant one.

When to Outsource Payroll

Generally speaking, the best time to outsource payroll is when it becomes more cost-effective to have a third party perform parts of the process than to perform them internally. This cost can be measured in terms of the compensation and benefit cost of the person responsible, as well as the opportunity cost of that person’s time. When the business owner is the person handling payroll, it is typically easy to justify the decision to outsource, since the owner should be focusing on adding value to the business.

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Indiana, Kentucky, Michigan, North Carolina Pennsylvania, South Carolina, West Virginia and Tennessee. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses.

For more information, visit us at focuscfo.com or follow us on LinkedIn.

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Indicators You Have Outgrown Your Entry-Level Accounting Software

Indicators You Have Outgrown Your Entry-Level Accounting Software

Indicators You Have Outgrown Your Entry-Level Accounting Software

Entry-level accounting software can be a very effective tool for small or startup businesses, and it will serve many functions and meet many small business’s needs up to a certain point. As a company grows, however, a time will come when the software will no longer have the functional capacity to meet the business’s evolving requirements. How do you, as a business owner or manager, know when that time has arrived? There is no specific revenue number or other metric that will tell you that it is time to pull the trigger, but there are indicators that you can look for so that you know when to prepare for a transition. It is important to pay close attention to these indicators so that you begin to make the transition before issues arise, and before you put aggressive growth strategies in place that will be hindered by inadequate systems.

Entry-Level Accounting Software – Who Needs It?

Entry-level accounting packages have several features that are attractive to small or startup businesses. They are inexpensive to acquire, easy to set up, have extremely user-friendly basic functions, and have adequate growth capability to accommodate the needs of small businesses during their early growth phases. The software typically offers a variety of standardized report templates for many of the simpler business models (simple from an accounting perspective), and an extensive knowledge of bookkeeping and accounting is not necessary to generate these reports.

The reports that come from basic accounting software provide basic data that is used only to support or confirm management decisions, rather than more specialized data that could be used to strategically drive business performance.

Company Growth and Evolving Needs

As a company’s revenue grows, the complexity of the company grows as well. More people are involved in the business, responsibilities are divided and delegated, transactions increase in volume and variety, and inventory and other working capital management becomes more complex and important. Eventually departments will be created, locations may be added, and product lines or services may be expanded. A larger organization generally means that more users will need access to the accounting package, and basic software packages typically can accommodate only a limited number of users that can have access to the system at the same time.

Also, as the company grows, the system’s primary purpose will shift from maintaining the accounting records to being a primary operating tool. With greater size and complexity, operations become more difficult to manage, and more review and supervision are needed. Management reporting tools will become essential to effectively make decisions and to drive performance and strategy.

Indicators That It’s Time for a New System

There are several simple indicators that you’ve outgrown your entry-level accounting software.

• The number of users on your system or the volume of transactions begins to cause noticeable issues in system performance.
• Necessary add-on packages begin to become time consuming and expensive, and they may also cause performance issues.
• You begin to use industry specific operations software, and you are having integration and data transfer issues.

Those three issues are fairly obvious indicators, but hopefully you will have realized your need for a more sophisticated system before you waste time and money trying to make too many small fixes to problems that will become larger.

The best way to know if you have outgrown your entry level software is to understand what a true management reporting system can do for you, and then think about the level that your business has reached and what your short- and long-term goals for the business are. In order to grow, you must be able to manage your business effectively based on specific, timely, and relevant information, and an entry-level accounting system will not provide the key reports and performance indicators that you need.

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Indiana, Kentucky, Michigan, North Carolina Pennsylvania, South Carolina, West Virginia and Tennessee. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses.

For more information, visit us at focuscfo.com or follow us on LinkedIn.

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Operating Efficiencies of a Contractor

Operating Efficiencies of a Contractor

Operating Efficiencies of a Contractor

The construction industry is facing major challenges due to the current recession. Companies are going out of business because of operating inefficiencies as well as overly aggressive bidding on significantly fewer available projects. Many of those contractors operated inefficiently in the past and still managed to maintain profitability because of the building boom, but in the current economic environment they are no longer profitable and facing liquidation. 

In order to survive in this competitive market, contractors must focus on the following operating indicators: 

Daily Job Costs

It is imperative to know the costs charged to each job on a daily basis. A contractor cannot wait until the end of the week, or even worse, the end of the month to determine what costs are being added to each job. This includes labor and material costs, and both must be properly tracked, measured, and recorded based on appropriate standards. 

Cost to Date Compared to Estimated Cost

Contractors prepare estimates for each job to determine their bid price or contract amount, and the estimates for labor and material are computed separately. Subcontract and equipment will also be estimated if they are necessary for the job. 

It is critical that the contractor constantly compare the cost to date to the estimated cost on each job. If there is a variance between actual cost and estimated cost, research needs to be done to determine what issues are causing the variance so that those issues can be managed appropriately. 

Reasons for costs exceeding budget can vary. Some of the most common reasons are labor inefficiency, material overruns, incorrect estimates, and changes in the scope of the job. All of those reasons are caused by underlying factors that must be managed. 

It is imperative to constantly monitor actual costs to estimated costs. A missed change order can be the difference between making a profit and losing money on a job. 

Gross Profit

As in every industry, gross profit is an important measure in the construction industry. A contractor must maintain a certain gross profit on every job to cover the cost of overhead and to create a net profit. 

The gross profit percentage starts with the estimating and bidding process, and it must be constantly monitored for each job in process. It is also necessary to determine the gross profit that will be earned on the backlog of work. 

Over / Under Billing

Contractors define over billings as billings that exceed estimated revenue and under billings as billings that are less than estimated revenues. Many contractors give over / under billing little consideration because they view over/under billing as a computation by accountants to properly match revenue and costs for financial statement purposes. However, over/under billing should be used as a tool to determine if the contractor is billing properly. Constant under billing on a job or jobs can be a signal that there is an underlying problem on the job that the project manager does not want disclosed. Obviously, it is generally desired to over bill on all jobs to create positive cash flow. The concern with overbilling, however, is that contractors sometimes forget that the excess cash generated will be needed for future costs on the job, and then they spend the money on unrelated items. 

In order to be competitive, contractors must monitor the above key performance indicators. With the help of an in-house or outsourced CFO there is no reason that any contractor should not be able to maintain these metrics in order to operate at maximum efficiency and profitability. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

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Keys to a Solid Relationship with Your Business Banker

Keys to a Solid Relationship with Your Business Banker

Keys to a Solid Relationship with your Business Banker

Cultivating a strong relationship with your banker can help you and your business achieve amazing success. Listed below are some key areas to enhance your relationship with your bank. 

View and Treat your Banker as a Partner in Helping You Reach your Goals

Help them get to know you and your company, business cycles, etc. Invite them to tour your facilities and meet your team. When your bank understands your business model and knows the key management team members (i.e., CEO, COO, & CFO), they tend to have more confidence in you and your team, which strengthens your relationship.

Do not view your bank as an adversary or as a party standing in the way of your business plans. Developing a relationship of trust and honest communication will go a long way with your bank. Try to utilize key bank services such as a lockbox and depository accounts. The larger your relationship with your bank, the more attention you are likely to get from your relationship manager.

Communicate with your Banker on a Regular Basis

 It is important to provide your relationship manager with financial statements on a quarterly basis at minimum. Meeting with your banker and bringing your CFO with you to review your results will enhance the bank’s confidence in your ability to manage your business. 

Maintaining and sharing a rolling 12-month P&L, Balance Sheet and Cash Flow forecast with your banker is also important. This activity not only keeps you aware of your current risks, growth, and capital needs, but it also allows you to be proactive with your bank when requesting additional financing. The forecast should include key drivers and other assumptions as analyzed and compiled by your CFO. 

Monitor and stay compliant with your loan agreement. Violations of bank covenants are a serious problem, particularly if you just started a new relationship. One of the worst situations that can happen to your company is to have your bank call your debt, leaving you scrambling to find new financing, which is likely to be difficult. Your CFO should manage your compliance procedures. 

Get to Know Others in the Bank that Will be Involved in the Credit Decision (Underwriter)

Bankers do not think and operate like equity investors. They have a much lower tolerance for risk. When you understand the banking environment, you can understand their requirements for secondary sources of repayment, collateral, and/or personal guarantees. 

Getting to know the underwriters in the bank will enhance your understanding of how the bank makes its credit decisions. This will allow you and your CFO to evaluate your financial position and how much credit your business is likely to get. This will also help you to address questions or concerns that your bank may have during the credit decision process. 

Keep Internally Generated Working Capital in the Business

Banks want to help their clients to successfully grow their businesses. Most banks will have tangible net worth requirements that require you to keep a specific level of capital in the business. Do not draw below this level, and ideally keep an amount of cushion above the requirement. Your CFO will use your financial statement forecasts to predict your capital levels. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

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How to Get Your Business Credit Line Increased

How to Get Your Business Credit Line Increased

How to Get Your Business Credit Line Increased

Renewing or increasing a bank Line of Credit (LOC) can pose a significant challenge for businesses today. Being a good customer, meaning that you have a history of making your payments on time, is not necessarily enough to warrant extended credit. In today’s banking environment, many other factors have become part of the credit underwriting process. 

It is common practice today for banks to analyze overall credit worthiness, collateral, and cash flow when making credit decisions; therefore, it is critical for business owners to understand their Balance Sheet, Income Statement, and Cash Flow Statement, particularly cash flow from operations. 

We will discuss the following key factors that business owners should consider when seeking an increased bank Line of Credit: 

1. How much is needed, why is it needed, and how much of it will be used 

2. What are the financial covenants and can your business meet them 

3. Your business collateral 

4. Communication with your bank 

How Much is Needed, Why, and How Much Will be Used

To calculate your funding requirements, you need a twelve-month cash flow forecast that incorporates accurateprojections for key cash flow inflow and outflow sources. The specific amount of funding required can only be determined by also including the fluctuations in all Balance Sheet accounts. Knowing how much you need and documenting your method to determine that amount will demonstrate your business credibility to the bank, and therefore increase your likelihood of approval.

The true purpose of a Line of Credit is to fill the funding gaps that occur due to the cyclical nature of a business caused by increases in accounts receivable and increased inventories that are due to increased sales, or by (preferably not) slow paying customers or obsolete inventory. Lines of Credit should never be used for the purchase of long-term assets or to fund losses. These amounts generally can’t be repaid within one year, which is the typical preference of banks. If your outstanding balance does not significantly fluctuate, it will be an indicator to your bank that your Line of Credit is not being used for cyclical funding gaps.

It is important not to request more financing than you really need. Accurate and expert cash flow analysis is the only way to determine this amount. If you ask for more financing than you need, the bank will question your competence; their confidence in you as a business owner is an important factor in their decision-making process.

What are the Financial Covenants

Virtually every Line of Credit comes with financial covenants, which are conditions of your funding and benchmarks that you must achieve. It is essential to understand these covenants and to comply with them. The most common covenants are working capital, liquidity, and debt coverage, but they can include anything else the bank considers relevant to risk, such as owner compensation, capital spending, retained earnings, owner distributions, tangible net worth, and more. 

Collateral

While cash flow is the main focus of banks, collateral is also of primary concern, and banks never lend 100% of the value of any collateral. Typical collateral for Lines of Credit includes qualified trade receivables and inventory. It is important to understand how banks define qualified collateral, and how to calculate its value. 

Communication

The business owner’s communication with the Banker is probably the most important and yet understated factor that the business owner must focus on – not just when trying to increase a Line of Credit – but all of the time. You need to have an ongoing relationship with your banker, and not just talk to them when you need to borrow money. Another important factor related to communication is providing the banker with documents that are required based on your financing agreements on a timely basis. Sometimes, not providing the information can cause a default of the loan, and it is your responsibility to provide that information and to make the banker’s job as easy as possible. This is a critical function of your CFO. 

If you, as a business owner, want to increase your Line of Credit, you need to understand the requirements and why they are in place. Banks want to lend money, but only for the right purposes and only when they are confident that it will be paid back. Having the right documentation in place to prove that you manage your business and your cash flow effectively will show your bank that you are a good candidate for additional credit. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

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Five Steps to Improve Your Business Cash Flow

Five Steps to Improve Your Business Cash Flow

Five Steps to Improve Your Business Cash Flow

We have all heard the saying “cash is king”. As a business owner, your biggest concern is always the cash balance of the company – you need to know that you will have enough cash on hand to meet your obligations. 

In any business there are three sources of cash: the business owner/investors, your bank, and the daily operations of the company. The cash generated from the company’s operations is the area where the management team can have the most impact at the lowest cost. Managing all sources of cash is a critical function for your business; protecting the liquidity of the business is the key to the success and future growth of your company. 

1. Rolling Cash Flow Projections

The first step is to develop rolling cash flow projections. These projections will inform the management team of the current cash balance and future cash requirements, which will allow the team to anticipate problems and develop solutions in advance of a cash crisis. 

Sales forecasts for these projections must be based on the appropriate current and historical factors, and forecasts of cash inflow sources and cash needs must both be accurately analyzed as well. The projections must also be updated and refined continuously so that they gain accuracy. 

2. Accounts Receivables

Accounts receivables should be analyzed to identify information that can be used to manage cash flow and to improve profitability. Several key metrics should be identified during this process; those metrics can be used to 

drive management decisions that will have a significant impact on the cash flow and the bottom line of the company. 

3. Inventory

Proper inventory management will be a key driver of business cash flow, and the process involves more than just measuring inventory turns. Several other key metrics should be analyzed that will provide critical information to include in the cash flow projections. The information will also help to drive the sales management process. 

4. Accounts Payable

Accounts payable management can have a bigger than expected impact on cash flow. If accounts are properly categorized and prioritized based on their impact on operations and other factors, the company will have a greater ability to preserve cash. Analysis of accounts payable also provides valuable information to include in the cash flow projections as well as for the inventory management process. 

5. Non-Core Assets

Accurate cash flow projections will enable the management team to identify core business operational functions as well as what actually drives the profitability of the company. Once this is determined, the team can begin to identify non-core assets that can be converted to cash, as well as functions that can be modified to positively impact cash flow. 

Taking these steps to improve cash flow from operations must be done quickly and with accurate information so that you, as the business owner, understand your company’s profitability by customer and product lines and can act quickly to protect the liquidity of the company and plan the future direction of the business. With positive cash flow and cash on hand, you can spend less time worrying about cash emergencies that may arise, and more time on strategic matters that affect business operations and your customers. 

It is critical that the forecasting process is accurate and timely, and if the current staff is unable to perform this task effectively, then you may need to seek outside support. Cash flow analysis and projections require highly specialized skills. A professional CFO will manage these functions to maximize the cash flow of the business so that your company first becomes healthy, and then can grow to the next level and beyond. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

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