From an outsider’s perspective, the accounting department is a black box.

What do they actually do?!? you ask.

Well, today we try and give you a few pieces to the puzzle (and more pieces in the coming weeks).

Today, we break down the different types of accounting work.

PS. next week we’re taking the week off as it’s the 4th of July here in America. I may have a special “off topic” treat, so be on the lookout. Series will continue on July 11th.

 But first, our sponsor. 

Thanks Ramp for sponsoring this issue.

 

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Demystifying Accounting: Types of duties & department structure

Last week we introduced a new series “We’re (accounting) not as weird as you think.”

The reality is, most people don’t understand how accounting works.

Since I now have a platform, even if it’s ever so rickety, I thought… why not use it to help you all understand it a little bit deeper?

So that means over the next 4 weeks we’re going to walk through the following:

1. How should you structure an accounting department?
2. What do all these people actually do besides annoy me with receipt requests?
3. The Accounting Cycle & rhythm of existence (why we’re so uptight)
4. How to create processes and procedures that work for accounting and you (why we’re so uptight part 2)

That means this week we’re going to talk about accounting department structure. But, to even get into structure, we need to understand the types of work in accounting.

When you think of accounting, it’s easy to think about debits and credits and that’s it. But there is so much more.

As with any job, finance and accounting departments have many different types of work.

I split this working 5 categories:

1. Transaction
2. Compliance
3. Reporting
4. Strategy
5. Tax

Let’s break it down.

Transaction

Transaction work and tax work are what people most often think of when they think of accounting.

Transaction work is the process of getting information from one place to the next. It’s often called bookkeeping in SMB when talking about the overall duties, but can be split into smaller categories.

Some examples of transaction work:

• Bookkeeping: the process of recording, organizing, and managing financial transactions.
• Accounts Payable: Processing invoices, payments, and vendor management.
• Accounts Receivable: Invoicing customers, tracking payments, and managing collections.
• Payroll: Calculating and distributing employee wages, handling payroll taxes.
• Expense Reimbursements: Processing employee expense reports and reimbursements.

Many of these buckets are combined into a single job (bookkeeper) until the business is big enough to support people for each individual role. Early in a businesses lifecycle, you’ll traditionally see an external Bookkeeper (though this could be an internal general admin person) processing transactions after the fact and someone within the business (often the owner) handling the AP payments and AR Invoicing. These require more proactive management and internal knowledge of the business, thus being handled inside the business.

Employees (or contractors) doing transaction work are typically entry level employees. These are the jobs done by people entering the profession or without the educational background (ie. no accounting degree).

And while transactions are done by entry level workers, it’s the foundation by which all other types of work sit on.

Reporting

Financial reporting can come in many forms, with the most recognizable being monthly financial statements:

• Income Statement
• Balance Sheet
• Statement of Cash Flows

But there is so much more than this to the statements in and of themselves.

Reporting’s job is to:

1. Verify the accuracy of the reporting
2. Provide valuable information in a timely manner
3. Produce additional financial insights/reports upon request

Accuracy & Timeliness

Your financial reports are only as good as the underlying transactions. If your bookkeeping isn’t right, your reports aren’t right.

To make sure the reports are good, it’s reporting’s job to do reviews to make sure things are correct. This job can also fall into the compliance bucket depending on complexity.

These reviews are a part of the process known as “accounting close.” Accounting close is a sequence of steps followed by the accounting department to ensure accuracy and consistency in accounting records. Accounting often prioritizes “right” over “fast” and in some companies close can take 30-45 days. This should almost never be the case. The best accounting departments do it in hours instead of days.

While we could get on a crazy tangent here, I’ll say accounting should generally lighten up on accuracy and put a higher priority on timeliness. This means incorporating a “soft close” which allows leadership to look at higher level numbers without all the minuscule detail.

Financial Insights

Reporting’s job is to help leadership access backwards looking information.

This is where there is some cross over to the strategy/FP&A roles, which we’ll address in just a bit.

For reporting, it’s about understanding leadership goals with backward-looking reporting and finding the right data and delivery method to help them read it.

Compliance

Accounting is driven by its rules. Those rules come from the accounting principles, but also tax and GAAP regulations.

Taxes drive what’s reported to the IRS. GAAP stands for Generally Accepted Accounting Principles.

GAAP is what drives public company accounting, as all public companies are required to comply with GAAP. For private companies, it’s a little bit different ball game.

See, you’re not required to comply to GAAP but many bank or debt partners require it.

It also assists in making financials consistent across periods or comparable to fellow companies within your industry.

Despite this, most small businesses aren’t running a pure GAAP financial because the cost and expertise required for full compliance is not worth the effort and cost.

If you’re interested in going deeper on this, let me know, and I can write a whole newsletter on it.

The different types of compliance work includes:

1. Adhering to accounting principles and regulations
2. Internal Controls meant to prevent errors or fraud
3. Audits, both internal and external, meant to review past data for compliance

This type of work isn’t typically needed (outside general accounting principles stuff) early in a company’s lifecycle. So, while it’s important the early hires have some understanding of GAAP and accounting principles, compliance specific employees don’t come into the picture until much later.

Strategy

I’m using strategy as an overarching category that includes both FP&A (Financial Planning & Analysis) and higher level CFO-strategic planning.

I’ve chosen to combine them because most FP&A work is done to support those strategic discussions.

Within FP&A you have two major forward looking categories: budgeting and forecasting.

But, the nature of trying to look forward often means looking back. The past is the best predictor of the future, right? So, because of this, there is quite a bit of crossover between FP&A and backwards looking reporting functions.

The goal of FP&A is to provide the best data to leaders who are doing strategic planning and guiding the business.

Within strategy, you have:

1. Mission/vision alignment
2. Goals alignment
3. Future plans
4. Implementation of plans
5. Measurement of plans

This is way oversimplified and quite frankly, strategy probably deserves a post all to itself.

The ultimate goal behind strategy is to have a vision for the future and create the plans to achieve that vision.

FP&A can help with that by providing good information, but a CFO or other finance leaders can provide strategic guidance based on their understanding of the business and professional opinion.

It’s so easy, especially in small businesses, for all strategy work to fall to the primary owner. But it’s important that different perspectives are included in this strategy discussion. A forward looking CFO provides a perspective that most owners or leaders can’t and is an essential hire as your business grows.

Tax

Everyone loves tax, right? Wrong. Tax is hated by even tax people (sometimes).

But understanding and managing tax is important, as it’s likely the biggest expense you’ll have over your entire life.

As a small business, the tax requirements generally fall to an external CPA and we want to keep it like that as long as possible. They’re in the trenches with tax and doing that is a full time job. Unless you have a full time need, you should generally avoid throwing this on the shoulders of a random employee.

If they came from the world, fine. Otherwise, trust your external partners.

Elements of tax include:

1. Compliance (filing)
2. Planning
3. Reviews & audits
4. Regulatory change tracking

It’s rare that a small business needs this person, so I’m not going to go deep here. I will only say: you HAVE to take this seriously.

In the next issue we’ll discuss the duties of a CPA and how they differ from the other jobs.

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We’ve left out some key functions from this discussion, like banking, treasury functions, and debt management. That’s okay for now—we’ll come back around to these as we discuss the specifics of the key positions.

Who should I hire?

The question every business owner has. I’ve heard too many times how much businesses despise making these hires and I get it. They’re not income producing jobs.

But the right hires mean you get the right information which allows you to make the right strategic decisions.

So back to the question: who should you hire?

Well, the order these concepts were introduced is often the order the hiring should be done.

In almost every business, the first hire is the bookkeeper. They’re responsible for making sure transactions are entered and correct. Many bookkeepers will produce financial statements, but they’re rarely done with a critical eye.

This often means owners or admin staff are doing AP payments and AR Invoicing. That’s fine and often works for a long time. But as your business grows, an AP or AR specific hire is often next.

As complexity in the business increases, it starts to become necessary to find a strategic partner. That can be a peer group, coach, or fractional CFO (​if you think you might need a fractional CFO, reach out here​).

What do I mean by complexity?

1. You’re growing rapidly
2. You have tight margins
3. You have big capital needs
4. You have outside investors
5. You’re taking on debt

People hire Fractional CFO’s too when they feel “in over their head” or are just tired of doing the strategy work alone. It’s great to have someone else contributing and offering an outside perspective.

Once you have a few transactional level employees and are profitable, it’s time to start with a management and/or compliance focused employee. This can be a Senior Accountant, Accounting Manager, or Controller. We’ll define these in the next issue of this series, but they’re usually equipped to manage the entry level employees and be a translator to the internal parties (other departments, leaders, etc) outside accounting.

So, to recap the hiring order:

• Bookkeeper (external then internal)
• Accountant, AP, AR, and other transaction work (could be multiple hires)
• Sr. Accountant, Accounting Manager, or Controller
• Fractional CFO (earlier if complexity introduced)

Sometimes you can get a more experienced person to do “all” the work and slowly bring people in under them. It all depends on what you can afford and what you want. You can also incorporate general administrative employees into the accounting work, which allows them to play a dual role and get more “bang for your buck.”

Remember: these are loose suggestions. Different businesses have different requirements and could require different sequencing.

If you’d like specific feedback, feel free to reply and I’ll do my best to help.

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Next week we’re taking a break since the issue falls on the 4th of July. So, in two weeks we’ll break down a little bit more each job and what that job entails. Hopefully then you’ll have a better sense of what is best for your business.

Let me know what you thought. Was this helpful? What did I miss? What questions do you still have?