April 27, 2010
This will conclude this round of posts on basic financial practices of a system integrator. Sure, there are a lot more to discuss. But for those of us engineers, we have to keep this in small doses. Before I let you go, here are a couple more fundamentals.
As the old saying goes, the only thing that is certain is death and taxes. Alliance Partners can’t escape this reality. Hopefully, death isn’t just around the corner, but taxes will be. So, you need to have a reliable process to account for and pay for taxes. While taxes may vary from geography to geography, they generally fall into two categories:
Sales taxes – Taxes on the goods and services that you sell. Do you have adequate measures to ensure that these are properly calculated, collected, and paid (to the appropriate government institution)? This includes exempt certificates for clients that don’t get charged tax on the products and services they buy.
Payroll taxes – Taxes due from the payments that you make to your employees. Typically, this is the money that they owe the government, but are commonly withheld by the company and paid to the government directly. How do you know that you are deducting the proper amount and paying that amount to the proper authority?
Perhaps, it goes without saying, but you should have processes to handle any other aspects of your business such as support contracts and services calls – how are they billed? When is the revenue recognized? You may also have additional products that you sell or material that you resale. Consider whether is a separate financial process to account for this business.
And, finally, you should have a defined practices for the handling of your financial records. Are they kept in an orderly manner and in a secure location? Do you have adequate measures to protect important financial information (e.g. duplicates of important documents, insurance certifications, account numbers, ….)
On my way to CSIA
I’ll be at the CSIA Conference on April 29-May 1. If you are tuned into this blog, you’ve probably already heard me talk about the Control Systems Integrators Association, an organization primarily of people who manage SIs who dedicated to the betterment of system integration by sharing best practices and promoting the recognition and importance of excellence. I look forward to their conference each year to learn from these experts – which I can, in turn, share with you. I look forward to seeing those of you who will be there to hear for yourself.
April 20, 2010
Getting paid in a timely manner for the work that you perform is critical to your profitability. So, you should define and manage your billing processes. Here are a couple of key areas.
Are quotes correlated with invoices?
Seems obvious, but care should be taken to make sure that your invoices match the quotes to which the customer has agreed. In doing so, you can greatly reduce confusion during the billing process that can result in unnecessary delays in receiving your payment. Not to mention the potential re-work.
It is amazing that some companies go to the effort to charge a customer for a change order, but lack the coordination on the back-end to ensure that it gets properly billed and paid. So, implement a process to ensure that you account for change orders. For instance, some Alliance Partners include a financial verification that the customer has paid all outstanding bills, before they can close a project.
There should be a defined process to monitor your accounts receivables. Set metrics (e.g. average days outstanding) that you can monitor and work to improve.
Then, establish a process to escalate and pursue overdue accounts. This may be a function of how long it is overdue as well as how much is outstanding. Whatever works for your company – just define it and stick to it.
You should also define similar processes for purchasing to ensure that you make timely payments. I know, I know – sounds like a vendor just wants to get paid on time (and we do). But, more importantly for your business, you can avoid problems (e.g. additional charges, credit hold, ….)
April 13, 2010
As a system integrator’s business grows to take on more projects, it is important to get a handle on your finances. How is money being allocated and spent? Are the expenses being documented and accounted for?
Chart Your Course
Another basic financial process is defining your ‘Chart of Accounts’. This is a list of well-organized list of ‘accounts’ to which you can assign your financial transactions. For instance:
- Asset (100s) Resources: cash, building, inventory, receivables
- Liability (200s) Obligations: payables, loans, accrued interest
- Equity (300s) Residual assets after deducting liabilities
- Revenue (400s) Earnings: Sales, service revenue, interest income
- Expense (500s) Expenditures: bills, rentals, depreciation, insurance
There are lots of examples of Chart of Accounts that you can find by searching the web such as this one by Small Business Notes. If you already have an accounting package, it may have a suggested format as well. After picking one, make sure that the costing codes are well-documented and consistently used, so you can enhance your financial accounting and reporting.
Within Your Budget
Once you have a reliable Chart of Accounts for tracking your expenses, it becomes much easier for you to create and monitor your budget. This will not only help you to adequately control expenses, but to plan for necessary expenditures.
The budgeting process starts with the defined account codes and allocations for each of those areas, including plans for capital expenditures. Then, monitor the budget on a regular basis and analyze for variances.
Staying In Control
Closely tied to the budgeting process is expense procedures. You should define:
- The procurement process including proper authorization, guidelines for expediting items, tracking receipts, ….
- Adequate measures for cash control including policies for spending, standard expense forms, ….
- Withdrawal policies (e.g. who, how much, what conditions, …) to reduce risk of embezzlement.
I realize that, in small companies, it is easy to say that we trust our employees, but it is still prudent to have reasonable measures to budget for and control expenses.
April 6, 2010
Regardless of whether you have a full-time controller or a bookkeeper that works with an external CPA, you need someone to ensure that you follow good accounting procedures.
General Accepted Accounting Procedures
GAAP is the term used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.
Good accounting packages for the system integration business are hard to find (or expensive). Some that are specifically designed for service-oriented businesses are:
Cash vs. Accural
There are two common accounting methods:
- Cash method – You record a financial transaction only when you receive or make a payment. This method is common for personal finances because it is less time-consuming, but it is limited. And, you can distort your income if you use credit or have inventory.
- Accrual method – You record when you sell or receive a part or service, not just when the payment is made. The method is more common in businesses because it provides a more accurate financial picture – by reflecting when value is created/transferred. Then, you can match income earned with expenses during a specific period.
While a lone consultant may find the cash method sufficient to run his business, most Alliance Partners quickly move to the accrual method as they begin to growth their business to handle the complexity of multiple projects by a staff of developers.