From $20 million to $50 Million: How to use finance and accounting to grow your business. (Part 1)
November 5, 2021 •ROARK
This blog post will discuss how to grow from $20 million to $50 million in revenue and how finance and accounting can help. Congratulations to all you business owners that have reached $20 million in revenue. It’s an impressive feat, and you’re helping the economy grow due to your efforts.
Finance and accounting are critical in helping you accomplish your plans to grow. These departments are responsible for analyzing all aspects of the company’s financial health and forecasting future financial needs based on planned growth strategies or other changes such as new hires or acquisitions. We’ll discuss how to use finance and accounting to grow your business from $20 to $50 million in two parts. In part one, we’ll dive into process changes. In part two, we’ll dive into people and systems.
Here’s a comparison of the different stages: like when a baby goes from using diapers to potty-trained or exploring their independence. Companies grow at various rates depending on what stage they’re in like from startup to $1 million, $1 million to $20 million, so while many entrepreneurs are nervous about crossing the $20 million mark, it represents success.
Manage by the numbers vs. gut feel of the business owner
Really up until this point or stage of growth, what really happens when you’re a small business owner when it comes to making decisions? You have to pay attention to your business and make decisions often based on your gut and instinct and —most of the time—80% or more – You’re right; maybe even more than that.
But with so much responsibility and growth, it’s hard to keep track of all the moving pieces. So as you grow more extensive and more diverse, it becomes even more challenging to stay on top of everything. At this level, you’re looking to approach your finances in a strategic way that will help manage things at an overall grade. Managing by the numbers versus gut feel becomes necessary.
3 Types of Reporting
There are three types of reporting that you’ll need as you grow from $20 to $50 million: tax, management, and external reporting.
Tax reporting is what you focused on, and with good reason. It’s how you’re going to pay the government for all the profits that they will want a piece of in exchange for keeping your company running as it should be.
Internal management reporting is essential to a successful business. Educating teams allows them the opportunity to make informed decisions and increase profits, taking appropriate action to bolster profitability when necessary
People often misconceive the meaning of management reporting and tie it to negative characteristics. Yet, this is an excellent way for businesses to identify those same positives that should continue or behaviors that need improvement if they don’t align with what the goal started as. However, many report elements such as KPIs or key performance indicators may require reviews for management’s reporting.
As a company grows, the number of departments it has increases. When you hit $20 million in revenue, for example, your business will want to start splitting up its focus between these departments so that it can keep track of multiple metrics – especially if one department is doing better than another.
There are all different ways to explore and compare your business’s performance. Sometimes you can see trends when looking at efficiency over time, such as with Operations data.
If you’re looking to grow your business, KPIs are critical, and so is accounting. Reports of the past help understand our history, but now you have to get more aggressive with partnership and taking a closer look at where you’re spending your money.
Most companies have budgets and forecasts to ensure favorable ROI on investments, correct? And management reporting also factors in budgets and forecasts to predict what we can expect for our company this year.
So as you grow your business to this level, there will be increased scrutiny on the details of your finances. Potential investors or amount lenders will want to see everything.
As you grow your business, there is also a different type of external reporting for every kind of basis. And interestingly, for taxes, there’s this thing called cash basis versus accrual basis. Think of cash-basis like the checkbook account and think of an accrual basis like your monthly bill.
So when I get cash, I will have revenue. Whenever I write checks, then it would be an expense. Cash-basis works for small businesses and their financials.
You may have to use accrual accounting, depending on the industry. Accrual accounting is different from cash-based in that it only assigns a value when you incur expenses or deliver products, not just when you collect revenue and payout costs (in cash).
Now this accrual basis is also known as GAAP, which are generally accepted accounting principles. If you go outside the company and look for investors or lenders, they will demand that your numbers be based on an accrual basis rather than cash.
But these GAAP-based financials are all about the language outsiders use. For example, they should be comparable, and when you provide them with financial data, they need to interpret it quickly. If I compare the numbers generated by company A and company B, there is no way to understand why they are so different. However, accounting on an accrual basis following GAAP provides essential context.
First off, it focuses on things like FASBI and all those other fiscal acronyms. It sets the tone in a standard for “hey, this is what financial statements mean when I get them,” and look; you’re going to do a better job of matching expenses with income across different periods so that you have a better idea about how your business runs.
Certified Public Accountant (CPA) Involvement Increases
In From $20 Million to $50 Million: How to use finance and accounting to grow your business (Part 2), we discussed the importance of finding a great CPA as this is especially important in ensuring that your tax planning strategies are done well and that you report taxes correctly.
The three levels of GAAP financial statements
You may have information and financial statements that present your company, but they might not be in this familiar GAAP format. That’s where a CPA comes in. They may create a compiled statement, a reviewed statement, and an audited statement.
A compiled financial statement takes information and places it in a format that is how the financial statement would be seen if an accountant prepared it.
A reviewed statement takes compiled information and then goes through its verification process, checking for any errors or inaccuracies.
An audited financial statement goes beyond a reviewed statement. It involves an independent, third-party auditor who reviews and verifies the company’s financial information and how it is communicated to investors.
Process changes in finance and accounting play a significant role in shaping the growth from $20 Million to $50 million. We can help you find the right balance between process, people, and systems to grow your business. Have you been trying to figure out how finance and accounting will work for your business? You’ve come to the right place!
In part one of our blog series on How Finance and Accounting Can Grow Your Business, starting at the $20 million in revenue stage, we looked at 3 types of reporting and what a CPA does with financial statements. For Part 2, we are going into more detail about People and Systems, so have no fear if this is where you need some clarity most! And don’t forget that we offer consultations – feel free to reach out with any questions or comments whatsoever.
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Like this series? Check out each of them in our series, From startup to $250 Million: How to use finance and accounting to grow your business.