Does your accountant just push paper, or is he or she a valuable part of your management team?
Accounting is the language that we use to communicate the health of our business. When many of us think of accounting we think of April 15th — tax day. However, there is a lot more to the accounting function with respect to the pest management professional than just taxes. A competent certified public accountant (CPA) should be able to file your taxes and prepare statements for banks, creditors and other stakeholders in your business. However, the overall goal of your accountant should be to help you accumulate and preserve wealth. Saving taxes is just a small part of this overall task. A competent accountant recognizes that he or she needs to be a valuable member of his or her client’s management team and is able to provide many more added value services than just tax preparation. The owner of a growing pest management business needs help with many of the financial aspects of his or her business.
As your business grows you need the internal structure and financial controls to support this growth. This aspect of accounting is called "management accounting" and will be the focus of this article. Management accounting has to do with compiling and reporting information that you need to improve the results of your operations. Many CPAs are in a unique position to help you in this area by helping you set up procedures to accurately record the daily transactions associated with doing business and by making observations about your firm and comparing that information to other clients they work with. Your accountant should be a trusted member of your management team, providing you information on ways to improve the efficiency of your business. The following are essential elements of the inside accounting function required to run a successful pest management business.
FINANCIAL STATEMENTS. Financial statements are the culmination of the accounting process. They are used to convey a concise picture of the profitability and financial position of your company. The two most important financial statements that allow you to get an accurate snapshot of your business are the profit and loss statement (P/L) and the balance sheet.
The P/L shows how much profit or loss your firm made for a given period. But more importantly it shows how that profit or loss was derived by category of expense and revenue. It is extremely important that your accountant understands the pest management industry because we use terminology specific to the industry (i.e., specials, intensives, one shots, baiting, termite labor, pest labor, etc.) and we have certain financial benchmarks to rate our businesses using this terminology that are unique to our industry.
The entire accounting process revolves around a general ledger chart of accounts. A chart of accounts is nothing more than a list of categories that define how we record our revenues, expenses, assets, liabilities and net worth. Without specific knowledge of our industry, an accountant will use a generic business chart of accounts, perhaps the same chart of accounts that a candy store might use. A growing pest management firm that uses a generic chart of accounts is at a distinct disadvantage to the larger players in the industry who use their chart of accounts to generate financial statements that allow them to analyze their businesses and answer important questions. Some of those questions are:
- Is my termite chemical expense in line with my termite revenue?
- Is my direct labor cost in line with my overall revenues?
- Am I spending more or less as a percentage of revenues than the average PCO on advertising?
- What percentage of my revenue do I spend on running my office?
- What are my vehicle costs as a percentage of revenues?
- I know I spend a lot on overtime…But do I spend too much on overtime?
The balance sheet shows the financial position of a firm on a given date (i.e., assets, liabilities and net worth). An easy way to distinguish the P/L from the balance sheet would be to think of the P/L as a statement showing how our business did in terms of revenue, profit and growth for a given period. The balance sheet would show us what our firm is worth as a result of all cumulative P/Ls and financing activities in the past.
BOOKKEEPING. Your accountant should be able to help you prepare your financial statements by providing you with bookkeeping services or overseeing the person who does your bookkeeping. With the proliferation of the Internet, many accountants now offer online bookkeeping services. This is an outstanding way for a pest control company to have its internal accounting supervised by a qualified accounting professional at a reasonable cost and it is done using ATM-like security.
Today, most bookkeeping is done using a computer. In this regard, I suggest that pest management professionals and their accountants use two types of software:
1. The first program should be industry specific and track all the money coming into the business — more specifically, revenue types, customer payments and accounts receivables. This program should also provide you with information on technician productivity and other marketing and operational information used to run your business. The program should have the capability to provide you with periodic reports that can easily be exported to your accounting general ledger package.
2. The second program should be an off-the-shelf accounting general ledger and accounts payable system such as Quick-books by Intuit or Peachtree by Sage Software. For the most part, PCOs do not keep large or complicated inventories or sell their services using sophisticated point-of-purchase devices. Therefore, we don’t require an elaborate or expensive general ledger program. In most cases these off-the-shelf programs should be adequate and they are extremely powerful. However, they need to be set up properly to give you the type of information that you require.
These programs will provide you information such as how much money you owe to suppliers, how much you have paid them in the past and profit by service. The general ledger program will actually generate financial statements at the push of a button. One word of caution though, the statements produced are only as good as the data entered into the package. Therefore, your accountant should set up office procedures to ensure that information is entered into your accounting system in an accurate and timely fashion.
BUDGETING. Budgeting is nothing more than formulating a coherent financial plan for some period in the future, usually one to two years. As the plan is implemented, we are able to rate our efforts compared to the budget that we created. Budgeting allows us to predict the amount of technicians, vehicles, equipment, etc., that we will need in the future, based on our revenue projections.
While many business owners think that they are too busy to do budgeting, there is nothing further from the truth. The reason that most small business people do not budget is because they are so concerned with meeting a payroll each week that they rarely take time to plan. Lack of planning continues a vicious cycle that underscores a relationship between the failure of a business to maximize its profits and the absence of planning. If you are running a growing pest management firm you can’t afford not to budget for the future.
During the budgeting process we determine the areas of spending that we can reduce. Revenues are analyzed to determine which are the most profitable and if there are other sources of revenue that can contribute profitably to the bottom line. Budgeting should be done annually and actual results should be compared to budgets monthly.
A/R MANAGEMENT. Accounts receivable management is an extremely important area of management accounting. A business that doesn’t have control of its accounts receivables will usually have poor cash flow and have trouble meeting its expenses in a timely fashion.
Accounts receivable management starts with laying out a formal procedure for collection. This procedure starts with an accounts receivable aging report. This report should categorize the firm’s receivables by age. There should be a "Current," "30-Day," "60-Day" and "More Than 90-Day" column. At each point along the way a collection effort should be made (i.e., at 30 days a phone call should be made to the customer, at 60 days a letter should be sent and at 90 days a stronger effort should be made). Pest management firms should not allow their receivables to go into the 60-day column. History shows that the older a receivable is, the more difficult it is to collect.
CONCLUSION. The accounting function is far more than filling out tax returns. The accounting function in the successful pest management professional’s firm allows PCOs to make sound business decisions about expansion, cost reduction and efficient operation of the firm. The management accounting function provides controls that ensure financial transactions are recorded properly and provides the information that allows the successful pest management professional to make those decisions based on hard facts.
At a minimum, the internal procedures within a pest management firm should include the use of financial statements, a well-supervised bookkeeping function, a formal budgeting procedure and an aggressive accounts receivable management program.
As your firm grows there are several other aspects of management accounting that should be explored and implemented. But the firm that successfully uses the principles of management accounting outlined above will accumulate much more in terms of wealth than the firm that operates by "shooting from the hip."
The author is a CPA and owner of PC Opportunities, a consulting firm in Budd Lake, N.J. He can be reached at dgordon@pctonline.com.
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