Organizing Financials That Make Sense

What problem did you tackle?

A service provider supporting coaches and speakers was frustrated that they could not get the info that they needed to from their financials. All of the bookkeeping was handled by a firm that handled their taxes, but rather than leveraging financial statements to help them make educated business decisions, everything in QuickBooks felt like a black box to the owners. Even things as simple as knowing how much money the owners could take out of the bank to pay themselves was only based on gut check instead of what actually was going on with the financials of the company.

Part of what complicated this was that QuickBooks was configured by the CPA firm with an apparent objective of “get to tax season,” and that was it. Transactions were grouped together in a way that helped complete line items on a tax form, but were not presented in a way that made it easy to understand how the business was doing. Their financials were set up in a way that served the accountants, when they should have been set up in a way that served the business – and that shouldn’t be mutually exclusive.

How did Norman Professional Services craft a solution?

NPS brought to the table its years of experience serving small businesses and helping them understand their financials and recommended a near complete overhaul of the company’s chart of accounts, which was how the company organized its assets, liabilities, equities, income, and expenses. NPS used QuickBooks’ native features to help display the slices of information that were jammed into the chart of accounts by the previous provider.

One area of efficiency explored was how the client was tracking spend by vendor. The previous provider created unique expense accounts for each vendor, which was redundant with QuickBooks’ native ability to organize transactions for each vendor (provided the data was entered in properly). If there was a need for investigating the total spend for each vendor, there was a unique report for that. But a reorganized and simplified chart of accounts allowed the company to focus on categories of expenses, like advertising or technology.

Additionally, NPS explored how the chart of accounts could give the business owners much needed visibility around its revenue streams. By defining unique products and services and their associated revenue accounts, leadership could see how each service offering was performing. Further, incorporating the cost of labor into Cost of Goods Sold brought to light what the company’s gross profit looked like after accounting for its workforce, rather than having it buried in the indirect cost of payroll expenses.

While making these updates, the team at NPS took the opportunity to educate the business owners on the changes that were happening. Time was taken to explain how this new way of organizing their transactions would help them understand the business from the financial lens. Focusing on the company value of Learners Who Teach, NPS sought to build the financial literacy of the company’s leaders.

What was the positive impact?

The business owners felt a complete transformation of their attitude toward financial information held in QuickBooks. Instead of the financial data being a place that they dreaded to be, the partners felt educated, confident, and comfortable in navigating financial statements and using them to their advantage to make educated business decisions.

Because they had better visibility in the company’s financial performance on both a cash basis and an accrual basis, the owners were able to figure out how to make regular payments and quarterly bonuses to themselves with greater ease and less stress. They built an owner compensation strategy that made sense for the long term health of the business, rather than just reacting to what the bank balance was on that particular day.

Additionally, because of the proper set up of products and services, there was a clearer reporting of recurring revenue versus one-off project revenue. This enabled the business to evaluate how much of a gap existed between monthly expenses and the recurring revenue. This informed strategies around business development for both recurring revenue and projects.

What’s next?

With the financial picture much clearer to the leaders of the organization, the stage is set for the company to choose the most important pieces of information to pay attention to. NPS already performs a readout of these financials during regular monthly meetings as well as addresses questions throughout the month to help ease financial worries stemming from a lack of understanding. A logical next step would be to distill down the properly-categorized transactional information into quick summaries of financial performance that serve as a dashboard on how the business is doing.

Norman Professional Services can provide further assistance by using this information define financial key performance indicators (KPIs). Together with client leadership, they can set strategies to create achievable goals to improve those KPIs. By evaluating the effects of initiatives in operations and sales, the company will be able to see where the financials are trending and either double down or course correct as needed.