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Moving From Bookkeeping to Accounting to Finance: How Big Should You Be?


This worksheet figures out when your company is big enough (and when sales volume is high enough) to justify adding higher-level staff to the accounting and finance area.

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* Moving From Bookkeeping to Accounting to Finance: How Big Should You Be?

Full Description

You'll put in:

  • Sales (in dollars) over a period of time
  • Salaried positions (in dollars) in the accounting area over the same period of time

The worksheet will tell you:

  • When to add executives (and what level of executive) in the accounting area of your company

The Expert
Dr. David Newton, DBA, Associate Professor of Entrepreneurial Finance, Westmont College, is a nationally recognized small business consultant in the areas of venture capital, start-up business plans, small firm strategic plans, privately-held firm valuations, small firm bankruptcy reorganizations, and entrepreneurial financial strategies. He is a frequent contributor/expert source to various trade publications including Entrepreneur, Money, Your Company, and Solutions, as well as various national and regional newspapers. He is also a regular speaker at numerous national and international entrepreneurship academic conferences, and a featured speaker/trainer for national and regional companies throughout the U.S. He is the author of Entrepreneurial Ethics: Values and Decision Making (Kendall/Hunt 1997) and the founder and managing director of the "Westmont Small Business Barometer," a semi-annual primary database and newsletter that chronicles entrepreneurial activity in south Santa Barbara County, California. He can be contacted by E-mail at Westmont College.

The Problem
For many growing companies, it's difficult to determine when is the right time to reshape the accounting area in a way that matches a company's changing needs, and when, realistically, a company can afford to add higher level accounting staff. What can happen is that a growing company pays less attention to making sure its accounting function is adequate , in order to focus on other aspects of the business, such as marketing, sales, and promotion. At some small companies, the accounting area is underpowered, because the companies may not realize that they can afford to carry a higher-level executive. It's crucial, according to Dr. Newton, to ensure that the level of accounting expertise and responsibility progresses in such a way that it matches the sales growth of a company. Companies need to simply determine the "sales carried" ratio, says Newton, to get a clearer picture of when to add staff.

The sales carried ratio (SC) is the firm's annual sales volume relative to the firm's annual costs of combined bookkeeping, accounting, and finance support personnel. The "magic number" for SC is 50: when a company's SC starts heading above 45, toward 50, it's a good indicator that it's time to change or add to the accounting area.

THE FORMULA AN EXAMPLE
Sales volume carried
Salaried positions		 =SC $1,000,000 sales
$20,000 part-time bookkeeper		 =50

Examples

Sales ($million) Accounting/
functions 		Salaried positions SC ratio Guidelines
less than 1.0 $20,000 part-time bookkeeper $20,000 50 less than 50@ less than $1m=OK
50@$1m=TOP*
1.0--1.5 Switch to full-time controller, ($50,000 total salary +benefits) who manages comprehensive computer-based accounting function, generate detailed A/R and A/P aging schedules, monthly P & Ls and cash budgets, periodic balance sheets $50,000 30 20@$1m=OK
30@$1.5m=GOOD
1.5--2.0 Add a staff accountant ($30,000 total salary and benefits) to report to controller, handles all A/P and A/R invoice/checking/receipt work, freeing controller to expand her focus into inventory management, managerial cost accounting, and basic financial statements preparation. $80,000 25 19@$1.5m=LOW
25@$2m=BETTER
2.0--4.0 Add another staff accountant ($30,000 total salary and benefits) to share A/R and A/P functions $120,000** 33 17@$2m=LOW
25@3m=BETTER
33@$4m=GOOD
5 Hire a Chief Financial Officer (CFO)* ($75,000 total salary and benefits) to supervise controller and do financial forecasting of sales, expenses, profit margins, break-even analysis, leasing versus financing of equipment acquisitions, debt versus equity in capital expenditures, and detailed financial ratio analysis $200,000** 25
5-10 Within this range, the existing four-person team will serve the company well as it learns to work together over time. After having made the big step of adding a CFO at $5 million, most companies will be able to remain steadily staffed, until reaching the next stress point: $10 million. Remains at $200,000 Starts at 25 goes to 50 25@$5m=OK
38@$7.5m=GOOD
50@$10m=TOP
10 Add staff financial analyst ($100,000 total salary and benefits) $300,000*** 30
Over 10 May choose to keep adding people Salary pool will increase accordingly Should approach 50

*When TOP is reached, it's time to reconfigure your accounting staff.

**Although the SC goes down at $5 million, adding a CFO at this point was done in anticipation of continuing sales growth and solid market performance. As the company moves ahead toward the $10 million mark, the SC ratio will improve again, increasing into the 40s at $8 million, dropping toward 30 at $10 million, and finally hitting 50 at $15 million in sales.

***All accounting team members are getting pay increases as the firm grows--dollar expenditures are both new positions, and increases to existing positions.

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* Moving From Bookkeeping to Accounting to Finance: How Big Should You Be?