SMB Structuring – The CPA Myth

The contrasts between large and small businesses are striking. By large, I refer to the range of companies from Fortune 500 down to middle market; by small, I mean small-to-medium-sized companies (SMBs) that typically have less than $20 million annual sales and less than 100 employees. On the surface, large and small seem readily comparable—both include basic business functions such as sales & marketing, operations, human resources, and finance.  However, the ability to staff each area with high-quality talent often varies considerably.  Large companies recognize a need for a variety of talent and they use their much larger budgets to pay for that talent. In contrast, SMB business owners with more limited budgets don’t always recognize the need to staff themselves adequately from a finance perspective.  They are too busy running their businesses.  Customers must be acquired and their needs met.  Products or services are manufactured and delivered.  Bills are paid. In most SMBs, the budget for senior management is usually spent in sales & marketing and operations functions and NOT on a highly compensated finance resource.

Under these premises, many SMBs begin making fundamental mistakes with respect to how they structure their finance departments. Mistake number one is to hire underwhelming talent. Mistake number two is to ignore one or more finance disciplines in the hiring process.  The four basic finance disciplines include strategic finance, compliance services, controllership / bookkeeping, and business process design.  Each takes years of training to master. The typical SMB retains a CPA firm to perform compliance tasks and some level of bookkeeping talent is employed to manage company records.  The strategic finance and business process design disciplines are often overlooked.

Often these finance staffs carry glorified titles like Controller or VP of Finance, but the titles don’t really reflect the nature of work being performed. The books are kept from a transactional level—customer invoices are being generated, deposits made, AP invoices received, and payments made-but no one is really thinking about what to do with that information on a strategic level. By strategic, we mean the level of information that contributes to financial decision making for the purposes of optimizing cash flow and improving profit. It is difficult to attract the right kind of finance talent into SMBs. Think about it. If you were graduating from college with an accounting degree, wouldn’t you rather choose to work for a large accounting firm with an ample training budget and promotion opportunities instead of working for a small company with a limited budget and advancement opportunities? So the status quo for SMBs is to attract underwhelming finance talent, oversee that talent with a management team that does not understand what to expect from their finance department, and plod along hoping everything will be okay.

Here is where the CPA myth comes into play. Business owners often mistakenly assume their CPA (who is fully qualified to handle compliance items) is also watching out for them from a performance perspective. The thought process goes something like this: “I don’t have time to look at my financial statements – that’s what my CPA is doing. If something ever goes wrong, he / she will tell me about it and help me resolve it.” However, that conversation rarely—if ever—happens. Most CPA firms in the SMB world are not in the business of selling consulting services outside of tax compliance and assurance (compilation / review / audit).

As a result of hiring underwhelming talent, overlooking critical competencies, and unrealistically relying on a CPA firm to stand guard, the business owner is left with a business that accumulates problems and has no effective means to address those problems.  In later blogs, we will address methods that SMBs can use to staff themselves with adequate talent while protecting their budgets.

Have you found businesses that are poorly staffed from a finance perspective? How do SMBs with limited budgets attract high-quality finance talent?  We would love to hear your ideas.