This article is for owners of businesses turning over roughly $2 million to $10 million who have a bookkeeper doing good work and a nagging sense that something is still missing. It will help you work out whether the gap sits in the bookkeeping or whether the business now needs someone taking a broader view of the numbers, and when it makes sense to bring in a finance manager.
That point often becomes clear in a meeting where somebody asks a reasonable question about margin, cash, pricing or performance and nobody can answer it without several days of work.
Bookkeeping and finance management are different jobs
A good bookkeeper keeps the financial records accurate and up to date. They reconcile bank feeds, code supplier bills properly, run payroll, lodge the BAS on time and keep the file in good order for your accountant.
That work is skilled and important, and strong bookkeeping gives a business a solid financial foundation.
A finance manager looks at what the numbers mean and how they should inform business decisions. They might build forecasts, examine the true cost of delivering work, review profitability by client or product line or prepare financial information for a bank, investor or board.
The two roles often get grouped together because they work with much of the same information and may use the same accounting system. Good bookkeeping gives you accurate records. Finance management helps you use those records to make decisions.
The signs that matter
Revenue alone will not tell you when you need a finance manager. We have seen $12 million businesses operate well with a bookkeeper and an engaged owner, while some $3 million businesses struggle because their reporting has not kept pace with the complexity of the business.
Start by looking at how quickly you receive reliable monthly numbers. If it takes more than ten working days after month end to get information you would be comfortable acting on, there is already a meaningful reporting gap.
Then look at the questions your reports can answer. Knowing that margin fell by four percentage points last quarter is useful, but you should also be able to see which jobs, clients or decisions caused the movement. Good reporting explains what happened and gives you enough information to decide what to do next.
The complexity of the business matters too. Multiple entities, long-running projects, stock, foreign currency and bank covenants all place greater demands on the finance function. The same applies when you have contractors alongside employees or grants with acquittal requirements.
Your own time can also tell you a great deal. If you regularly spend ten or more hours a month checking figures, chasing information or rebuilding reports in spreadsheets, part of the finance function already needs a clear owner.
When more bookkeeping will help
Additional bookkeeping capacity can be the right answer when transaction volumes have grown and the workload is starting to affect accuracy or timeliness.
In other businesses, the bookkeeping itself is working well and the gap sits in the analysis.
The Australian Government’s guidance on business record keeping explains which records businesses must keep and how long they need to keep them. A capable bookkeeper will generally manage those requirements comfortably.
A growing business also needs answers to commercial questions. You may want to know your gross margin by service line or whether the business can fund a new site. You may need to understand what happens to cash if a major client delays a project by three months.
Those questions need analysis and forecasting as well as accurate records.
Get the reporting right first
Before recruiting, work out what financial information the business actually needs each month.
For many businesses, a good starting point is a monthly reporting pack delivered within eight working days of month end. It might include margin reporting and a rolling cash forecast, depending on the business. Once that reporting is in place, you can see which questions it answers and where you still need senior finance input.
Some decisions need experienced financial input at particular points during the year. Pricing, funding and larger commercial decisions may call for a senior finance person for a few days each month, even when the business does not need that level of support full time.
Clear reporting also makes it much easier to define a future finance role. You can set out what the person needs to produce, where they will spend their time and how you will measure the role.
Unclear expectations can make a first finance hire difficult for both the business and the person joining it. A strong candidate still needs to know what they are responsible for and what the business expects them to produce.
What a finance manager costs
A full-time finance manager in Sydney is a significant fixed cost. For a business turning over $3 million to $5 million, the work may only require two or three days of senior finance attention each week.
At this stage, many businesses need experienced financial input before they need another full-time employee.
Prime’s virtual CFO and outsourced finance team works with businesses at this point. We can help with forecasting, margin analysis and board reporting at a level that suits the business, while your bookkeeper continues to look after the day-to-day accounting work.
As the business grows, a full-time finance role may eventually make sense. By then, the new hire can step into an established reporting process with clear responsibilities from the beginning.
Five questions to test your finance function
Before writing a job ad, write down the five questions you most want answered about the business over the next twelve months.
Use real questions in your own words. Which clients make us money? Can we afford the second site? What happens to cash if the big contract slips by a quarter? What should we charge next year? Do we have a pricing problem or a delivery problem?
Give those questions to whoever currently owns the numbers. Ask them to answer each one within a week and show you the workings behind the answer.
If you get thoughtful answers backed by reliable numbers, the finance setup you already have may be doing exactly what the business needs. If the response mainly restates historical results, you have identified the part of the finance function that still needs work.
As the business grows
Growth adds financial questions quickly. A new site, entity or product line changes the information you need for forecasting and decision-making, which is why we include the finance function in our business growth and expansion work.
Professional services businesses often encounter these questions early because people account for much of their delivery cost. A profit and loss statement does not always show the true profitability of individual clients or pieces of work, which is one reason we have a dedicated professional services practice.
If your five questions are difficult to answer, look at what information is missing and how often you need it. That will give you a much better basis for deciding what the finance function needs next.
If you would like to work through those questions with us, book a conversation with Prime Partners and bring them with you. We can look at your current setup and help you work out the level of finance support the business needs.