Run Your Business with More Clarity – How to leverage a CPA’s expertise in helping your small business grow
Jan 18, 2023 | 10 Min Read
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An entrepreneur running a small business already has enough on his plate, striving to survive in the fierce business environment dominated by larger corporations & newer, smaller competitors, constantly having to differentiate their product offering to mark their presence and grow their market share.
An entrepreneur running a small business already has enough on his plate, striving to survive in the fierce business environment dominated by larger corporations & newer, smaller competitors, constantly having to differentiate their product offering to mark their presence and grow their market share.
What is a CPA?
Chartered Professional Accountants (‘CPA’s in Canada) and Certified Public Accountants (‘CPA’s in the United States) are no ordinary accountants. They have completed a rigorous training and examination program on accounting practices, and tax laws, measuring and managing risk, and have fulfilled all ethical requirements within the context of the professional code of conduct and professional standards. This means that they have a responsibility to act faithfully in the best interests of their clients/employers or end up in conflict with those professional standards and potentially, run afoul of the laws, regulations and standards risking their good standing as members of the associated professional body.
CPA designs processes and controls, enabling efficient & accurate bookkeeping by administrative staff and bookkeepers
A small business does not necessarily refer to one that is small in size or numbers, but any firm that has one or more of the following characteristics:
- Dominance of one or a few individuals in the company’s operations
- Dominance of one or a few individuals in the company’s operations
- Lack of segregation of duties within the different departments or accounting systems
- Unprofessional or unsophisticated record-keeping systems
- Limited accounting knowledge among the decisions makers and unwillingness or inability to hire specialists in the accounting domain
Furthermore, CPAs are able to build an accounting process that increases security and reliability in the data and transactional flow, allowing for ease in record keeping of financial transactions.
Effective internal controls are essential in preventing or reducing fraudulent activity (embezzlement), especially in small businesses, as this risk is most prevalent is small businesses, typified by inadequate or unsophisticated internal control environments. CPAs can design internal controls to safeguard the assets of the business from theft, assist the firm in achieving its objectives, and ensure the reliability and accuracy of financial information by reducing errors, both human-created and not. Accounting systems designed by CPAs allow for the detection of variances from targets and thorough analysis between budgeted and actual results.
Internal control procedures are designed to ensure completeness and accuracy of all financial transactions, segregation of duties especially for authorization of payments, cash & treasury handling, performance of inventory and other asset counts through reconciliations against balances that are already available in the systems. They also allow for the validation of transactions, verification of the existence of assets and liabilities, early detection of and correction of errors and prompt preparation of financial reports as per generally accepted accounting principles (GAAP), or international financial reporting standards (IFRS).
CPAs are able to provide appropriate training to bookkeepers and other employees to ensure competency in performing their assigned duties, for understanding of the significance of ethical behavior and provision of a channel to report suspected errors or frauds. They are also capable of overseeing the activities conducted by the bookkeepers and other respective human resources in the department.
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CPA expertise can ensure risks are identified well ahead of the issues taking hold
Analysis of the financial performance and financial position of the firm requires special expertise and knowledge, possessed by CPAs through the learned ability to analyze the financials of the company in depth.
An example of such is through the following question. Does a healthy profit necessarily indicate a strong financial position of the business? A business may be generating strong profits by selling on credit with higher margins but may also be unable to generate cash quickly enough to pay off its liabilities. Cash is the lifeblood of every business, and CPAs can advise the management of small businesses on effective strategies to prevent the firm from getting cash-strapped or even defaulting. They can also point out how and where the company’s working capital is piling up, which can enable the early identification of the problem, giving the CPA and his or her team an ability work out a solution with the management, in advance of the problem materializing fully.
The use of financial ratios and their proper analysis allows CPAs to identify worrisome trends well ahead of their existence. Periodic calculations of ratios and comparison with the previous years, previous periods’ positions, or even comparing them with industry averages allows for efficient decisions on certain matters that could help the business grow, or stymie problems that will cause the business to flounder.
Ratios are categorized based on profitability and efficiency, working capital and leverage of the firm to form an opinion on the current standing of the business in the market and how it compares with its competitors. If the profitability of the company is less than the previous year or industry average, a CPA can guide the owner on how to reduce costs, increase revenues or increase margins altogether.
Similarly, working capital analysis is a crucial factor in assessing the ability of the business in meeting its short-term liabilities. Working capital is essentially the cash required by the business in its daily operations. CPAs are able to advise management on the liquidity position of the company and various strategies as to how to increase the liquidity & solvency of the business. It may be that the inventory is moving slowly, creating a larger and larger draw on working capital, or the owners have allowed too generous payment terms to customers while purchasing from suppliers on stricter terms. All of these minute details are accurately assessed by CPAs before finalizing a successful business strategy for long term growth and profitability.
Too much debt may push the company towards the edge of the hill, fighting for survival. Thus, better cash management may allow the company to increase borrowings to an optimal level and at favorable borrowing rates.
Ratios on efficiency can provide some further insight on the efficient use of the assets in generating both revenues and profits. With the help of a CPA, small businesses can shift their assets to more profitable avenues. Also, as CPAs are always required to stay up-to-date with current developments within the profession and associated regulations through their ongoing professional development obligations, they are able to advise small business owners on opportunities for growth.
CPA expertise can ensure risks are identified well ahead of the issues taking hold
The benefits of a CPA, or CPA-led team, does not end here. During tax season, owners may find it hectic and extremely difficult to compile all necessary documents and information required for the timely and accurate filing of taxes. Not only is this task troublesome, but it tends to move focus from growing the business to more petty matters that could be well handled by others, not tasked with growing and managing the business. A CPA can take charge of all tax related matters, ensuring peace of mind for business owners so that they may have more clarity in vital business matters.
The benefits of working with a CPA more than compensates for the costs associated with hiring or engaging a CPA, or a CPA-led team. Not only do they help in filing tax returns and designing effective accounting procedures and systems, but they can also provide forecasts of future cashflows, make monthly, quarterly or yearly budgets, provide guidance on financial matters and funding issues, as well as financial implications of venturing into new business avenues, possible mergers, takeovers, and so on.
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