Accounting Department Lifecycle
Congratulations! You’ve started your own business and are enjoying the freedom it provides. You can make decisions on your own and can react to change quickly. You build whatever it is you want to sell and you are on your way to bringing customers on board.
Phase 1 - DIY or “the Relative”
Along that road you realized there are lots of things you need to track and either started to account for them yourself or brought on someone that was cheap or free to do the work (aka family). This person will usually accounting for transactions on a cash-basis, possibly on a modified cash-basis. (Kudos to you if you quickly realized that was something you should delegate - your the business owner, not the accountant.)
Your accounting needs start off pretty simple but as volume increases, long-term agreements are signed and you start shipping goods to customers the level of complexity increases fast. Your cheap or free bookkeeper’s ability to properly account for these transactions is getting max’d out. You may or may not realize this has happened, but it did. Finding that out during your first audit is the most expensive way to find that out.
Phase 2 - Accounting Manager
In this phase, you realized it's time to hire someone full time; primarily someone who can improve the accounts receivable and accounts payable functions. They are familiar with accrual accounting, but not necessarily the complexities of Generally Accepted Accounting Principles (GAAP) or the benefits that method of accounting can provide to management.
This person isn’t cheap. If you’re in California, you are looking at $40,000 - $60,000 + fringe. Although the accounting manager has the ability to fill the accounting void you detected, they are normally not documented, process-focused or fully aware of the more complex transactions revolving around deferred assets, revenue recognition, or stock options. They’ll do for now, but as you grow you’ll need more and swapping this person out for a more experienced accountant will be hard to do.
Phase 3 - Controller
Good news, if you made it this far, you business has grown and you have found the need for proper budgeting, forecasting, and, in general, more controls and supervision of additional accounting staff.
Things are getting a little more risky at this level. This may mean investors or banks are now depending on the accuracy of your accounting data. You need someone who is capable, no, reliable, on getting things right. This person, in California, is in the $60,000 - $100,000 range. You need to pay for this level of expertise.
In general, the controller should establish procedures and internal controls to ensure the accounting data leads to accurate financial statements. They should also be capable of helping you transition the accounting data from a historical-focused pain that needs to get done into data that helps management direct the course of the business - what we call Accounting Intelligence. These come in the form of a financial statement line item narrative, variance analysis, and KPI comparisons to name a few.
Phase 4 - CFO
At this final phase, the financial needs of the organization are such that you will require a financial strategic plan. The CFO is responsible for the financial and risk management portions of the business. Your business would now be facing some fairly complex debt and equity transactions and requires a solid cash and tax strategy that are in like with the overall strategic direction of the company.
A person at this level, in California, is over the $100,000 level and will have a more complicated compensation package usually include equity in the form of stock options.
As you look at the needs of each phase, it should be apparent that each phase requires more skill and a deeper understanding of the direction of the business. In most cases, everything you see in Phases 1 − 3 could easily be outsourced. There are many businesses that even outsource Phase 4 as they are in a transitionary mode where full-time assistance is not needed.