Accounting is the language that we use to communicate the health of our business. When many of us think of accounting we think of April 15th – TAX DAY.
However, there is a lot more to the accounting function with respect to the Service Firm owner than taxes. A competent CPA should be able to file your taxes and prepare statements for banks, creditors and other stakeholders in your business. The overall goal of your accountant should be to help you accumulate and preserve wealth. Saving taxes is just a small part of this overall task. A competent accountant recognizes that he/she needs to be a valuable member of his/her client’s management team and is able to provide many more added value services than just tax preparation. The growing service business needs help with many of the financial aspects of their business.
As your business grows you need the internal structure and financial controls to support this growth. This aspect of accounting is called Management Accounting and will be the focus of this article. Management Accounting has to do with compiling and reporting information that you need to improve the results of your operations. Many CPAs are in a unique position to help you in this area by helping to set up procedures to accurately record the daily transactions associated with doing business and by making observations about your firm and comparing that information to other clients that they work with. Your accountant should be a trusted member of your management team, providing you information on ways to improve the efficiency of your business.
The following are the Best Accounting Practices for Landscapers and essential elements of the inside accounting function required to run a successful service business.
ACCOUNTING PREPARATION OF FINANCIAL STATEMENTS
Financial Statements are the culmination of the accounting process. They are used to convey a concise picture of the profitability and financial position of your company. The two most important financial statements that allow you to get an accurate snap shot of the results of your business are the Profit & Loss Statement (P/L) and the Balance Sheet.
The P/L shows how much profit or loss your firm made for a given period. But more importantly it shows how that profit or loss was derived by category of expense and revenue. It is extremely important that your accountant understand the service industry because we use terminology specific to the industry and we have certain financial benchmarks to rate our businesses using this terminology that are unique to our industry.
A growing Service firm that uses a generic chart of accounts is at a distinct disadvantage to the larger players in the industry who use their chart of accounts to generate financial statements that allow them to analyze their businesses and answer important questions such as:
- Is my Material expense in line with my revenue?
- Is my direct labor cost in line with my overall revenues?
- Am I spending more or less as a percentage of revenues than the average firm on advertising?
- What percentage of my revenue do I spend on running my office?
- What are my vehicle costs as a percentage of revenues?
- I know I spend a lot on overtime…But do I spend too much on overtime?
The Balance sheet shows the financial position of a firm on a given date (i.e. assets, liabilities and net worth). An easy way to distinguish the P/L from the balance sheet would be to think of the P/L as a statement showing how our business did in terms of revenue, profit, and growth for a given period, and the balance sheet would show us what our firm is worth as a result of all cumulative P/Ls and financing activities in the past.
ACCOUNTING AND BOOKKEEPING
Your accountant should be able to help you prepare your financial statements by providing you with bookkeeping services or overseeing the person who performs your bookkeeping. With the proliferation of the Internet many accountants now offer online bookkeeping services. This is an outstanding way for the service business to have his internal accounting supervised by a qualified accounting professional at a very reasonable cost.
ACCOUNTING AND BUDGETING
Budgeting is nothing more than formulating a coherent financial plan for some period in the future, usually one or two years. As the plan is implemented we are able to rate our efforts compared to the budget that we created. Budgeting allows us to predict the amount of technicians, vehicles, equipment, etc. that we will need in the future based on our revenue projections.
While many business owners think that they are too busy to do budgeting, there is nothing further from the truth. You see, the reason that most small business people do not budget is because they are so concerned with meeting a payroll each week, that they rarely take time to plan. Lack of planning continues a vicious cycle that underscores a relationship between the failure of a business to maximize its profits and the absence of planning. If you are running a growing service firm you can’t afford not to budget for the future.
During the budgeting process we determine the areas of spending that we can reduce. Revenues are analyzed to determine which are the most profitable and if there are other sources of revenue that can contribute profitably to the bottom line. Budgeting should be done annually and actual results should be compared to budgets monthly.
ACCOUNTS RECEIVABLE MANAGEMENT
Accounts Receivable Management is an extremely important area of Management Accounting. A business that doesn’t have control of its accounts receivable will usually have poor cash flow and have trouble meeting its expenses in a timely fashion.
Accounts Receivable Management starts with laying out a formal procedure for their collection. This procedure starts with an Accounts Receivable aging report. This report should categorize the firm’s receivables by age. There should be a “Current”, “Thirty”, “Sixty”, and “Over Ninety Day” column. At each point along the way a collection effort should be made (i.e. at 30 days perhaps a phone call to the customer, at 60 days perhaps a letter and at 90 days perhaps a stronger effort). In any event the service firm should not allow a very large percentage of their receivables to go over the sixty-day column. History shows that the older a receivable is, the more difficult it is to collect.
The accounting function is far more than filling out tax returns. The accounting function in the successful service firm allows the owner to make sound business decisions about expansion, cost reduction and efficient operation of his firm. The Management Accounting function provides controls that ensure financial transactions are recorded properly and provides the information that allows the successful owner to make those decisions based on hard facts.
At a minimum, the internal procedures within a service firm should include the use of financial statements, a well-supervised bookkeeping function, a formal budgeting procedure and an aggressive accounts receivable management program.
As your firm grows there are several other aspects of management accounting that should be explored and implemented. But the firm that successfully uses the principles of Management Accounting outlined above will accumulate much more in terms of wealth than the firm that operates by “Shooting From The Hip”.
Contact the Turf Books Team for more information on the Best Accounting Practices for Landscapers and our expert accounting advice!