What it is and Why it Matters for a Growing Business
As an Alberta business owner and operator, you need to keep accurate books, have reliable reporting and a clear understanding of your tax obligations. That’s part of running a business, but, when your company is growing, a one-size-fits-all approach to accounting isn’t as useful. For example, the financial questions for a law firm are not the same as the questions facing a construction company, a retailer or an e-commerce brand.
Growth adds layers of complexity. Growing companies might need to hire more employees, take on larger projects, serve a larger customer base, introduce new services, carry more inventory, manage multiple payments channels, or operate across several locations. While all of this contributes to generating more revenue, it could also mean facing tighter cash flow, higher overhead and greater operating expenses.
For an established business, accounting should do more than track transactions. It should be used to keep leadership informed about the profitability of the business. Issues concerning cash flow and debt to equity ratio need to be reviewed to make strategic decisions. This requires an accounting approach that reflects how the business actually operates.
The details on how to do this vary by industry, but one thing is certain. The right financial information should be put in place to help a growing business make better decisions before minor issues become expensive ones. Let’s take a look at some specific industries to get a better idea of what your business might need.
What Matters to a Law Firm?
As a professional services provider, law firms’ finances can quickly become complicated once more lawyers and support staff are added, and the client base expands. Simply reviewing a Balance Sheet won’t tell the whole story. Leadership needs to understand how time, staffing, collections and overhead affect profitability.
Law firms need accounting practices that support more organized records. The goal is not to simply produce financial statements at year-end. It is to give leadership a clear view of how the practice is operating throughout the year. For this reason, a growing law firm should compile information by practice area, each lawyer and client type. This can help to identify where the firm is performing well and where revenue is being offset by high delivery costs or delayed billing causing slow collections.
Questions for law firms to ask:
- Which practice area is most profitable?
- How long does it take to bill and collect after work is completed?
- Are staffing costs aligned with revenue?
- Where can administrative tasks be automated?
What Matters to a Trades and Construction Business?
Trades, contractors and builders face a different set of challenges. In particular, job costing is essential. Labor, materials, subcontractors, equipment, permits, travel and change orders can all affect the profitability of a project. When those costs are not tracked consistently, it can become difficult to know whether pricing is realistic or if certain projects are even worth pursuing. BDC notes that proper costing is distinct from routine bookkeeping and is important for understanding profitability and setting prices.
Cash flow can also be uneven. The business might need to do payroll before receiving final payment from a client. The bigger the project, the more amplified the timing gap. While there could be profit on the books, there could be pressure on the bank account where payments exceed revenue. A business can appear busy with projects yet underperform when there isn’t a reliable way to determine the true costs of each job.
As the business grows, payroll process becomes more important to consider. Accurate payroll records, deductions and remittances are not only administrative tasks; they affect compliance and the business’ ability to plan future hiring with confidence.
Questions for trades and construction companies to ask:
– Which jobs generate the strongest margins?
– Are materials and labor costs being estimated properly?
– How much cash is tied up in outstanding invoices?
What Matters to Retail and E-Commerce Businesses?
One of the main differences for retailers (for both bricks and mortar and online), is that they often operate a high volume of transactions with thin margins. Sales might look strong, but the business still needs to factor in inventory costs, shipping, returns, discounts, payment processing fees, advertising costs and payroll.
Inventory is one of the most important areas to keep in check. Too little inventory can lead to missed sales. Too much can tie up working capital and leave the business holding onto goods that move slowly. For this reason, it’s important for growing companies to consider holding additional working capital to purchase inventory and finance accounts receivable as sales increase. BDC notes that growing product-based companies often need additional working capital to purchase inventory and finance accounts receivable as sales increase.
GST / HST record-keeping is especially important. The CRA requires records to describe related goods and services in enough detail to determine whether these taxes apply. As transaction volume grows, well-structured systems reduce the risk of errors and make reporting more manageable.
Questions retailers should ask:
- Are our current job costing practices accurately capturing all direct and indirect expenses per project?
- What is our true overhead cost per labor hour, and are we using the correct markup or margin for our pricing strategy?
- Are we utilizing the most tax-efficient revenue recognition method for our longer contracts?
What Every Growing Business Needs From its Accountant
Regardless of the industry, every growing business needs the same three outcomes: a clear understanding of profitability, cash flow analysis and systems in place that can support the next stage of growth. Let’s consider each of these for your growing business.
A Clear Understanding of Profitability
Revenue is just one part of the picture. An established business needs reports that show where profit is actually being created. Depending on the industry, that can mean reviewing margins by practice area (for lawyers), by project (for trads and construction) or by product (for retailers and e-commerce). Better information helps leadership make more informed decisions about pricing, staffing and where to best focus the business’ resources.
Cash Flow Analysis
When more expenses going out are greater than cash coming in, a profitable business can still run into difficulties. Payroll, supplier payments, tax obligations, inventory purchases and equipment costs can create pressure even though the business is in a growth mode. Regular reporting and cash flow planning can help the business anticipate these needs instead of reacting after a problem occurs.
Systems to Support Growth
Processes that worked when the business was smaller may become inefficient as transaction volume, staffing or reporting requirements increase. A growing business will need more structured bookkeeping, workflows, integrated payroll, better accounts payable and receivable processes. Plus accounting software that provides up to date information will be necessary to make critical decisions. The goal is to reduce manual work while improving accuracy.
Final Thoughts
Accounting principles apply across industries, but the most useful financial information is specific to the way a business operates. For any growing business, the right accountants should do more than give you a Balance Sheet. They should help you create a financial system that supports better decisions as the company becomes more complex while in a growth stage.
Has your business outgrown a one-size-fits-all accounting approach? Explore the industries Crescendo supports or book a consultation to discuss what your business. We have the reporting, payroll and corporate accounting support a growing business need.
Contact us today for a free consultation to see if we’re the right fit for you!
Schedule a Consultation
Could you be missing out on thousands?u00a0