As I have written before, cloud-based accounting is a system. You must have a systems mindset to manage it.
Working with cloud-based accounting software is like turning on a firehose of data.
Bank feeds. Credit card feeds. Shopify orders. Document feeds. Plooto feeds (do not worry I will explain!)
The power of cloud-based accounting is this – data from multiple sources can feed into your accounting software.
Why is that good?
It saves your team time. Accounting becomes dynamic, happening in real-time. No clerks entering debits and credits transaction by transaction at discrete times during the month.
And herein lies a problem my friends. Two problems to be precise.
With cloud-based accounting, documents flow into your software without human intervention. Hundreds, thousands if you are a bigger company.
If those systems are not managed or understood a big mess can get created! It is the old cliché, garbage in, garbage out. Except now the garbage is flying in at lightning speed one document after another.
This can be challenging to unravel. And time consuming.
There are three things you must do to manage cloud-based accounting…
Number One – Set-Up Your Systems Correctly
You must design your systems elegantly. You must understand how information flows into your software and how to manage it, in real-time.
For example, when you set up bank feeds your software will (in the background, usually daily) log in to your bank and pull your banking transactions into your accounting software.
It will look for matches to transactions you have entered. When it finds a match, it will suggest you click “ok” to reconcile.
It is important to ensure that the systems of matching are aligned with the actual transactions entered.
This is one system.
You may have invoices being synced from an online shopping system, like Shopify.
Here, if you do not have the syncing setup correctly your inventory, sales tax reporting, accounts receivable, sales orders…pretty much everything…. could end up being a mess.
Number Two – Manage Your Systems
It is imperative that you have a highly focused technician, who understands software to manage the systems.
You will have transactions flowing into your software from various sources (feeds). However, you cannot assume that the transactions are correct. Some transactions can be pre-set to always be posted in the same way. That is fine.
An example would be fixed rent. The rent you pay to the landlord is always the same and will always get posted to the same account. You can set up a transaction like this to flow in without any human intervention.
Does the same apply to telephone bills? You can setup your system to fetch the bill from your phone provider (log in the phone provider and post the transaction). It can be setup for auto pay.
But wait, stop. What if the bill is wrong? What is the phone provider charged you $500 for something you did not use?
You will want your sharp technician to check exceptions to the rules and flag them for review.
Number Three – Technicians Must be Trained in Accounting
It may seem like, with cloud accounting, that you do not need to know how accounting works!
This is not true. Cloud accounting is still accounting. Every transaction in accounting has at least two sides.
For every event in accounting, at least two (often quite a few) things happen. Every single transaction has two sides. There is no such thing as a one-sided transaction in accounting.
Take a sale. You sell a product. What happens?
Someone now owes you something. Accounts receivable has gone up. Sales has gone up.
Taxes were involved, so taxes went up.
Your inventory went down, and at the same time, Cost of Goods Sold went up.
All these debits and credits must balance.
Debits and credits can be very confusing to non-accountants.
Therefore, your accounting technicians must understand basic accounting and how each transaction changes various accounts on your Balance Sheet and Income Statement.
A systems driven person, not understanding basic bookkeeping, will not see the background entries being done by the software.
The problem emerges when you need to unravel a mess.
Cloud accounting is fast. It is a system. To manage correctly you need to have it managed by people who understand software, systems, and basic bookkeeping.
With one of those three ingredients missing, a mess can emerge.
A man I trust (he has been right so often) predicts we may have about two more fat years. Followed by six lean years.
Fat years? Fat years? Yikes, imagine what the lean years will look like!
These past 19 months have been brutal on businesses. Restaurants. Pubs. Airlines. Travel agents. They have been pummeled.
What is the one thing that people do – most often – when things are going great?
They assume the sun will always shine, and they spend more.
This is the worst thing that any business owner can do when times are rockin’ is to add to their fixed costs.
There are six things you can do to thrive during tough times.
Keep Your Fixed Costs Tight
The first thing to do when times are good is keep fixed costs tight.
Go through all your operating expenses and ask which ones are discretionary versus fixed.
What is the difference between the two? Let me explain…
A discretionary cost is something like advertising. Unless you are locked into advertising contracts you can often turn advertising costs on or off.
Rent as part of a lease is often fixed and cannot be turned on or off.
Some wages may be fixed and some not. If you have long-term employees, it would be difficult to just shut them out without severance pay which could be high.
With all your discretionary costs separated from your fixed costs…
Work Out Your New Break-Even Sales
Take your total fixed costs from above and divide the number by your Gross Margin percentage.
Your Gross Margin percentage is calculated by first subtracting your total Cost of Goods Sold from your total Sales. That number is called your Gross Profit. Divide your Gross Profit by your total Sales to get your Gross Margin %.
Here is an example – your Cost of Goods Sold is $30,000. Your Sales are $50,000. Subtracting $30,000 from $50,000 you get $20,000. When you divide $20,000 by $50,000 you get 40%.
Based on your calculation above you determine your bare bones fixed costs are $60,000.
Taking $60,000 and dividing by 40% you get $150,000. That is what your break-even sales must be.
Next, ask yourself this…
Can I Raise my Prices?
In a tough market you will need to be careful raising prices. Is there something of value you can add? Can you add something that would cost less than the price increase people would be willing to pay?
A price increase – with no loss in sales volume – goes directly to the bottom line.
If price increases are not possible, look to….
Can you bundle together other products or services to increase your average sales per customer?
Can you add services to a product that were never added before? An example here would be installation services for electrical products.
Restaurants during Covid use delivery services, like Skip the Dishes, to maintain sales.
Learn to Live on Less
My friend says we have two lean years left before 6 years of famine. These two fat years are anything but fat for most businesses.
Now is the time to eliminate debt, and save, save, save. Live on less.
Bring Supply Chains in Close if Possible
In the West we have become very depdendent on Asia (China, Korea, Viet Nam, India) for manufacturing.
With supply chains being broken in 2021, ask yourself if you can find a supplier within Canada or the USA. If you manufacture, can you start the process of bringing your manufacturing back to Canada/USA?
Six things to do over the next 2 years:
Lower your fixed costs
Know your break-even sales. (This goes down as your fixed costs are lowered)
Raise prices by adding value
Bundle services and products to increase your average sale
Many readers of my blog know I am on a bit of a rant about all-in-one software… I promise that today I will only spout an itsy-bitsy rant. (And it will not be until way down near the end)! Manufacturing companies comes in all shapes and sizes.
Type 1 – Full In-House Manufacturers
The first are those ones who control all aspects of their processes internally. They buy raw materials, and they produce finished goods. There is a labour component and a manufacturing overhead component. They need a production scheduling software that manages labour and raw materials. They need a production scheduler and planner. The most complex production and accounting challenges emerge from these companies.
Type 2 – Production is Partially Outsourced
The next grouping are those who outsource part of the production to an outsourced manufacturing supplier/partner. They essentially assemble the finished goods. They are less labour intensive than the first type. They would likely not need a complex production scheduler component as part of their software requirements.
Type 3 – All Production is Outsourced
The 3rd group are those that outsource pretty much all the work to a partner and buy back the finished goods. Think Canadian and USA manufacturers who outsource production to a Chinese company/Partner.
A Few Examples
Imagine a company making organic food from scratch. They process raw materials into finished goods. There is a production team in-house. There is an internal labour component built into the finished product. There are labour variances and material variances. What is a variance? It is the difference between what you expect something will cost to make a finished good and what it actually costs you. You will start with a recipe of exact amounts of each ingredient, plus the labour cost, plus an applied manufacturing overhead cost. When you start a production run of a batch of product you expect to get an exact amount of finished product from a recipe of raw materials and labour. The reality is that it will not always go the way you plan. Your production team was either more efficient or less efficient. If more efficient, you will have a positive variance. This means it cost you less to make the product than you planned for. If you are inefficient it could be for a number of reasons. Raw material costs may have been higher than planned. You may have used more quantities than planned. The same goes for the labour component.
Choosing the Right Software
When you pick software for your business you want to pick one with the right features for you. For simpler manufacturing operations – ones that do not need complex production scheduling – Unleashed Inventory software is a great choice! It allows for many features you need without the extra complexity. You can track batches (critically important for food manufacturers). You can track serial numbers – vital for computer sales, as an example. Unleashed (great name, eh?) will allow for recipe creation (technically called your Bill of Materials) as well. What is does not have is extensive production scheduling for labour and raw materials. For that you will need MRPEasy. It is an amazing software that offers in-depth production scheduling for a full-service, in-house manufacturer. Both these awesome mid-tier cloud-based software programs sync beautifully to Xero or Quickbooks Online.
Now, for my small rant. The people that designed these awesome, extremely focused software programs for manufacturers knew their limits. They did not keep going and add elaborate accounting modules. Why not? Because accounting for them – like for you – is not their area of expertise. They smartly created a link to software that does accounting better than they ever could. Together you get the best of both. If you need help choosing which software is best for you, message me on LinkedIn. Thanks for reading…
I have written – more than once – on the attraction people have for all-in-one software.
It makes no sense. Yet it is pervasive. So, yet again, let me take another stab at this.
Look at your personal life. You have online banking. You do not send emails from your online banking, do you? Do you want to?
You go to Facebook, jump to Twitter, then LinkedIn (oh, whoops that is business). Each has separate log-ins.
Each software has a unique function. You need to do a personal budget. Facebook has a module for that. Just kidding.
Would you trust it if it did? I am not referring to security. Plain excellence. You would likely do a budget in Google sheets or Excel, right?
Three Industry Examples
Here are some business examples from 3 separate industries:
Real Estate Industry – core brokerage software could be Broker Wolf, or, more recently, Loft47. Neither has an accounting package. Broker Wolf has a sync to Quickbooks Desktop. Loft47 syncs seamlessly to Xero.
Home Health Care Industry – two main scheduling software packages are – ClearCare and Alayacare. Neither has an accounting package. They do a fabulous job at scheduling, tracking patients, and billings. They do not even have a payroll module.
Technology Industry – two main software packages dominate about 90% of the global market. Autotask and Connect Wise. Neither offer an accounting package.
When an industry-centric software does offer an accounting module they tend to suck. Really suck. How bad do they suck? Really bad. No bank feeds, horrible reports, not up-to-date with tax reporting to name a few things.
Conversely, when a great accounting package starts to add modules for manufacturing, health care, and so on, it will suck too.
The accounting software has a bigger problem. Think of the sheer, stunning number of industries they would have to add as modules! Why not just let really smart software developers have access to your software through open APIs (techy abbreviation for Application Program Interface)?
Then, boom, you get the best of both worlds!
Here is a hilarious advert for all-in-one business software just to really drive my point home, for the, uh, 3rd time…
Selling something, whether a product or a service, and not getting paid is brutally painful.
Sloppiness in your billing process will cost you. The ultimate cost is not getting paid.
As I have written about many times before, the cost of a bad debt is more than the actual dollar value lost.
What do I mean?
Consider a bad debt of $1,000. Did you lose just a $1,000? Yes, you did lose $1,000, but…
You need to recover that $1,000, right?
Let us say that you sold a computer for $1,000. The computer cost you $800. That leaves $200 to cover your overhead. That is called your gross margin.
To recover that $1,000 lost as a bad debt how many computers do you need to sell?
Five. Yup, gulp, five.
How so? Do the math.
5 computers sold @ $1,000 each = $5,000
The cost of those computers is 5 @ $800 = $4,000
The difference is $1,000. The bad debt has now been recovered only after selling an additional 5 computers.
So, is the bad debt just $1,000, or $5,000? I say $5,000.
9 Principles of Managing Accounts Receivable
Develop a clear, internal accounts receivable procedure.
Understand your new customer.
Credit check your new customer
Mutually agree terms with your customer before delivering goods or services
Issue the invoice immediately after delivery of goods or services.
Politely chase your customer before the invoice is due to ensure they are on track for payment.
Continue politely and persistently chasing your customer for payment if they have not paid by the due date.
Optional – for truly troublesome customers, go ‘nuclear.’
Thank your customer for payment as soon as possible after receiving it.
4 Cornerstones of Your AR Procedure
Schedule invoice chasing time every week.
Book the time out in your calendar in advance. Never cancel it, never miss it.
Maintain invoice communications histories.
Log all communications with every customer about every invoice. Emails, phone calls, letters, meetings – log it all
We use a cutting-edge program with our clients called Chaser. All communication gets logged in a portal for each customer.
Regularly assess problem invoices
For larger businesses, this may mean holding credit control meetings. For smaller businesses, this should be covered in regular finance meetings. Always complete bank reconciliation on the day of the meeting to ensure you are working with the most accurate and up to date info.
We stay on top of our bank reconciliations for all our clients daily. For clients who pay by cheque it is critically vital to deposit cheques received within a day.
Inform the business of bad payers!
If assessing problem invoices reveals customers with poor payment trends, let other departments in your business who have touch points with them know. This may be sales reps or account managers.
4 Questions You Must Ask New Customers
What information do you need to make payment?
Who should I speak to in order to settle payment on this invoice?
When do you make your payment runs?
What are your business details for invoicing purposes?
By getting answers to these 4 questions, you will avoid:
Getting paid late
Having to re-do invoices, resulting in more internal labour costs
If you are struggling with accounts receivable, message me, we can help.