Bookkeeping vs Accounting: Differences & Benefits

Bookkeeping vs Accounting: Differences & Benefits

by | Mar 24, 2023 | Accounting

As a business owner, managing finances and staying on top of financial obligations is crucial for success. To achieve this, businesses need two important financial services: bookkeeping and accounting. In this blog, we will explore the differences between bookkeeping and accounting services and discuss how each service can benefit businesses.

What is Bookkeeping?

Bookkeeping is the process of recording, organizing, and maintaining financial transactions. A bookkeeper is responsible for managing accounts payable and accounts receivable, reconciling bank statements, and preparing financial reports.

There are two types of bookkeeping systems: single-entry and double-entry. Single-entry bookkeeping is a simple system where each financial transaction is recorded once, either as income or expense. Double-entry bookkeeping is a more complex system where each transaction is recorded twice, once as a debit and once as a credit, ensuring that the books are always balanced.

What is Accounting?

Accounting is the process of analyzing, interpreting, and summarizing financial data. An accountant is responsible for preparing financial statements, analyzing financial data, providing tax advice and planning, and performing audits. There are different types of accounting services, including financial accounting, managerial accounting, tax accounting, and auditing.

Bookkeeping vs. Accounting

 

While bookkeeping and accounting are both essential financial services for businesses, there are key differences between the two. Bookkeeping is focused on recording and maintaining financial transactions, while accounting involves analyzing and interpreting financial data. Bookkeeping is typically more transactional and repetitive, while accounting is more analytical and focused on providing insights to help businesses make decisions.

Bookkeeping Services

Bookkeeping services include maintaining financial records, managing accounts payable and accounts receivable, and preparing financial reports. For small and medium-sized businesses, bookkeeping services can be especially helpful as they allow business owners to focus on running their business instead of spending time on financial record-keeping. Bookkeeping services can also provide insights into financial trends and identify areas where businesses can improve.

Accounting Services

Accounting services include tax preparation and planning, financial analysis, and audit support. Larger businesses may require accounting services to help with complex tax issues, financial analysis, and audit preparation. Accounting services can also help businesses make informed financial decisions, reduce tax liability, and improve overall financial performance.

Bookkeeping and Accounting for Healthcare

For healthcare businesses, like any other type of business, bookkeeping and accounting services are essential to ensure financial stability, compliance with regulations, and strategic decision-making. However, there are specific considerations for healthcare businesses when it comes to these services.

Bookkeeping services for healthcare businesses typically include the management of accounts payable and accounts receivable, payroll processing, financial statement preparation, and tax preparation. Bookkeepers in the healthcare industry must have knowledge of industry-specific regulations, such as HIPAA, and be able to manage financial data related to patient care, insurance claims, and reimbursements.

Accounting services for healthcare businesses involve more advanced financial analysis and strategic planning. These services include financial statement analysis, budgeting, forecasting, tax planning, and audit support. Accountants in the healthcare industry must have knowledge of healthcare regulations, such as the Affordable Care Act, and be able to analyze complex financial data related to patient care costs, insurance claims, and reimbursements.

One key consideration for healthcare businesses when it comes to bookkeeping and accounting services is the need for accurate and detailed financial records. Healthcare businesses must comply with strict regulations related to patient privacy and data security, so it is important that financial records are managed in a secure and confidential manner. Additionally, healthcare businesses must be able to track and report on patient care costs accurately to comply with regulations and ensure financial stability.

Another consideration for healthcare businesses is the need for specialized knowledge and expertise when it comes to financial management. Healthcare regulations and industry-specific financial practices can be complex, so it is important to work with bookkeepers and accountants who have experience in the healthcare industry and understand the unique financial needs of healthcare businesses.

Bookkeeping and Accounting for SaaS

For SaaS businesses, bookkeeping and accounting services are just as important as they are for any other type of business. SaaS companies deal with a unique set of financial challenges that require specialized expertise and knowledge.

Bookkeeping services for SaaS businesses include maintaining accurate financial records, managing accounts payable and receivable, and preparing financial reports. Since SaaS businesses often operate on a subscription-based model, bookkeepers need to be able to track recurring revenue and monitor changes in subscription levels. Additionally, bookkeepers may need to manage revenue recognition for SaaS businesses, which can be complex due to the nature of subscription-based revenue.

Accounting services for SaaS businesses can include tax planning and preparation, financial analysis, and audit support. SaaS businesses may have unique tax considerations, such as sales tax compliance across multiple states. Additionally, financial analysis can help SaaS businesses identify trends in customer behavior and usage, which can inform product development and pricing strategies. Audit support can also be important for SaaS businesses seeking to raise capital or undergo a merger or acquisition.

When choosing a bookkeeping or accounting service provider for a SaaS business, it is important to consider their experience and understanding of the unique challenges facing SaaS businesses. Look for a provider who has experience working with SaaS businesses of a similar size and complexity. Additionally, it can be helpful to choose a provider who uses up-to-date technology and software to streamline processes and improve accuracy.

Bookkeeping and Accounting for Private Equity and Venture Capital

Bookkeeping and accounting services play a crucial role in the success of private equity and venture capital businesses. These businesses face unique financial challenges that require the expertise of experienced professionals to manage their financial operations effectively.

Bookkeeping services for private equity and venture capital businesses involve maintaining accurate records of financial transactions, managing cash flow, and preparing financial statements. These services help businesses keep track of their financial performance, identify potential risks, and make informed decisions.

In addition to basic bookkeeping services, private equity and venture capital businesses may require more advanced accounting services, such as tax planning and compliance, financial analysis, and audit support. These services help businesses manage complex financial issues, reduce their tax liability, and make informed investment decisions.

One area where accounting services for private equity and venture capital businesses are particularly important is in managing their investment portfolios. These businesses typically invest in a wide range of companies and assets, which can create complex accounting and reporting requirements. Accounting professionals can help businesses manage these requirements, including tracking investment performance, valuing assets, and preparing financial reports for investors.

Another important area where accounting services are essential for private equity and venture capital businesses is in managing their fundraising activities. These businesses often rely on raising capital from investors to fund their operations, which requires careful financial planning and reporting. Accounting professionals can help businesses develop and implement effective fundraising strategies, prepare financial projections and forecasts, and provide guidance on how to meet investor reporting requirements.

Choosing a Bookkeeper or Accountant

By outsourcing your financial operations to a trusted service provider, you can achieve greater success and focus on growing your business. Once you have decided whether your business needs bookkeeping or accounting services, it is important to choose the right service provider. Factors to consider:

Cost: Bookkeeping and accounting services can vary greatly in cost, depending on the provider, the level of service, and the complexity of your business. It is important to choose a provider that fits within your budget, but also provides the necessary level of service.

Experience: Look for a provider with experience in your industry, as well as with businesses of a similar size and complexity. You want a provider who understands the unique challenges and needs of your business.

Availability: It is important to choose a provider who is available when you need them, whether it be for monthly bookkeeping tasks or year-end tax preparation. Consider their response time and availability during peak periods, such as tax season.

Technology: Technology has become increasingly important in the world of bookkeeping and accounting. Look for a provider who uses up-to-date technology and accounting software to streamline processes and improve accuracy.

Referrals and reviews: Ask for referrals from other business owners or professionals, and read online reviews to get a sense of a provider’s reputation and level of service.

Communication: Choose a provider who communicates clearly and regularly with you, and who is willing to explain financial concepts in a way that you can understand.

Tips for Selecting a Service Provider

You should schedule an initial consultation to discuss your business needs and ask questions about their services.

Ask for references and follow up with those references to gauge their level of satisfaction.  Look for certifications and affiliations with professional organizations, such as the American Institute of Certified Public Accountants or the National Association of Certified Bookkeepers.  Request a detailed proposal or engagement letter outlining the scope of services, fees, and terms of the engagement.

Both bookkeeping and accounting services are essential for businesses of all sizes. By outsourcing your financial operations to a trusted service provider, you can achieve greater success and focus on growing your business. Contact us today to learn more about bookkeeping and accounting services.

Bookkeeping and Accounting FAQs

Q: Are bookkeeping services necessary for all businesses?

A: Yes, bookkeeping services are essential for all businesses, regardless of their size or industry.

Q: Are accounting services necessary for all businesses?

A: Accounting services are typically more necessary for larger businesses with more complex financial needs.

Q: Can outsourcing bookkeeping or accounting services save businesses time and money?

A: Yes, outsourcing bookkeeping or accounting services can save businesses time and money by allowing them to focus on running their business instead of spending time on financial record-keeping, and by providing insights into financial trends and identifying areas where businesses can improve.

Guide for Start-Ups Looking to Partner With an Outsourced Accounting Firm

Guide for Start-Ups Looking to Partner With an Outsourced Accounting Firm

by | Feb 23, 2023 | Accounting, Startups

For investor-backed companies, like start-ups, an outsourced accounting firm, also known as a financial operations management and outsourced accounting firm, offers many benefits that allow start-ups to scale, save time, and reduce operational costs and risk. Learn how to leverage a financial partner to help you and your team keep up with the demands of expansion, regulators, and investors.

What is Outsourced Accounting?

An outsourced accounting firm is a professional firm that provides financial services to client businesses. These firms are hired to provide specific services like bookkeeping, financial reporting, payroll processing, and tax preparation. An outsourced accounting firm can provide more comprehensive and reliable services than an in-house accounting team.

Common functions that investment-backed companies outsource include:

  • Bookkeeping
  • Managerial accounting
  • Tax accounting
  • Audits
  • Controller services
  • Financial analysis
  • Payroll services
  • Compliance
  • Human resources

How Investor-Backed Companies Can Benefit from Outsourced Accounting

In the early stages of development, start-ups don’t usually have an established or consistent revenue stream, making growth and long-term financial stability essential goals.

As start-ups do grow, they need the right financial infrastructure in place to handle the rising cash flow, regulation requirements, and overhead costs.

This is where an outsourced accounting firm can deliver immediate value by offering these benefits:

Build Trust With Investors

Outsourcing accounting services can be a smart move for start-ups looking to impress their investors. By working with a reputable accounting team, start-ups can demonstrate to investors that they are serious about their financial management and have taken steps to ensure accuracy and financial transparency.

Additionally, an experienced accounting team can provide valuable insights and recommendations that can help start-ups make informed financial decisions and optimize their cash flow. All of these factors can contribute to a more positive perception of the start-up by investors, increasing the chances of securing funding and building long-term partnerships.

Access to Experts Without Overhead

No one in business disputes the value of a quality CFO, but affording one with a start-up budget can put this essential role out of reach. Outsourced accounting firms make industry-leading expertise financially accessible.

They bring a level of experience to the table that start-ups may not have in-house or cannot afford to bring in-house. By leveraging the knowledge and skills of an external accounting team, start-ups can ensure that their financial management is accurate, compliant, and up-to-date without diverting internal resources away from core business activities.

Improve Internal Controls

Without a CFO in place, investor-backed businesses have no one to spot signs of fraud, like unusual transactional or billing activity. This puts companies at greater risk, which can be eliminated with an outsourced accounting partner.

Enhanced Data Security

Financial operations management firms protect business data with encrypted cybersecurity programs. This can be a real point of confidence for a start-up’s investors and employees, knowing that personal customer or employee information is safe.

Flexibility to Scale

A good outsourced accounting firm will tailor its services to meet its clients’ most immediate needs. This is good news for investment-backed companies who need to stay financially lean. By outsourcing financial duties, a start-up can save money by limiting spending to critical areas only.

Start-ups only pay for the services they need. Plus, start-ups can scale and decrease services with the ebb and flow of businesses. With an in-house team, you have to pay salary and benefits regardless of the workload.

More Time For Growth

Outsourcing can also free up time and resources for start-ups and their leaders, allowing them to focus on growth strategies.

First and foremost, outsourcing allows start-ups to delegate time-consuming and complex accounting tasks to an external team of experts, freeing up internal resources. This can be especially important for start-ups, which often have limited staff and resources.

Outsourced accounting for start-ups can also provide access to advanced accounting tools and technology that they may not be able to afford or implement in-house. This can help to streamline accounting processes, reduce errors, and increase efficiency, making growth an attainable reality for start-ups.

Advanced Services You Can Expect from an Outsourced Accounting Firm

In addition to the benefits above, a financial operations management and outsourced accounting firm can provide these added perks to your invest-backed business.

Cash Flow Management

Use your outsourced partner to run an analysis of your expenses and profit statements. With this information, your partner can plan effective strategies to deal with potential roadblocks.

Forecasting

Leverage your partner firm’s forecasting experience to map out strategies that address performance needs in the short and long term.
Growth and Exit Strategies

Let your outsourced accounting firm prepare business plans, forecasts, and other essential documents needed to raise more capital for growth.

Process Improvements

Who better than an outside financial expert to advise on areas where your start-up can improve efficiencies? This includes things like month-end reporting, credit and collections, and even your business strategy to maximize returns.

Potential Cons of Partnering With an Outsourced Accounting Firm

While there can be some potential obstacles when working with a financial partner, most can be avoided with good communication up-front and by finding a firm that feels like a natural fit.

Outsourcing for the First Time

If you’re not familiar with using an outsourced accounting firm, you may not know how to fully leverage the firm’s capabilities. To avoid this, start-ups can ask potential partners to walk them through their typical work process.

Cost

While using an outsourced accounting firm can save investment-backed companies money, if not carefully managed, the partnership can cause costs to soar quickly. This can be prevented by asking potential partners for a detailed estimate and factors that would impact the price. Also, be upfront about your budget. A good financial partner will tailor a solution to match it.

Poor Communication

Bad communication can result in many of the issues above. From the start, make sure you and your outsourced accounting firm are in agreement on the process and modes of communication, as well as goals and objectives.

Bad Fit

Just as there are numerous types of investment-backed businesses, there are also numerous investment firms that specialize in niche sectors. Look for a firm that has experience with a company similar to your size, structure, and industry.

Tips to Help You Choose the Right Financial Partner

As we mentioned, many of the potential risks of hiring an outsourced accounting firm can be avoided if you’re able to find a firm that understands your culture, verticals, and goals. Here are questions and considerations that can help you find the best fit.

What Are Your Short and Long-Term Business Needs?

Start by taking into account your specific business needs to determine if they’ll be met in your partner’s tailored package.

What services or support do you need?  What type of data is being shared with external personnel, and which tasks should remain in-house because of their confidential nature? For instance, if your company requires tax accounting or bookkeeping but not payroll processing, these duties are ideal for outsourcing.

What Is Your Budget?

If you are unsure about how much it will cost to outsource your finance and accounting services, don’t fret. You can make an educated guess based on some key factors.

Ask yourself:

  • How much can my organization afford to spend on outsourced services?
  • What specific services does my organization need?
  • What value will the services bring to my organization?
  • Are the costs of an in-house team and technology stack cheaper than the cost of an outsourced team and technology stack?

Keeping these questions in mind can help you make an informed decision about the cost of outsourcing your finance and accounting services. You can also compare and contrast pricing between your top picks.

Check the Firm’s Reputation & Experience

It is important to do your research when looking for potential providers. Check out what previous customers have to say about them, and make sure they have experience in industries or with clients similar to yours.

It is important to find a financial outsourcing partner that has experience in the industry and understands the complexities of your business. Make sure to ask for references from previous or existing clients.

Ask Questions

Here are a few questions to get you started, but you’ll likely have questions specific to your business structure.

  • What experience do you have working with start-ups?
  • What accounting software do you use and what features does it have?
  • What services do you offer, and what is your pricing structure?
  • How do you ensure the accuracy and timeliness of your services?
  • How do you communicate with clients?
  • Are you familiar with any tax regulations specific to start-ups?
  • What is your experience with raising capital?
  • What other services do you offer that may be beneficial to a start-up?
  • Are you willing to provide references from other start-up clients?

Next Steps

If you’re ready to start your search for an outsourced financial partner, here are a few to-do’s to complete before you begin your search:

  1. Are you open to new and updated accounting practices?
  2. Are you willing to share access to your financial data with a partner?
  3. Is your team ready to adopt process improvements your financial partner may recommend?

Contact Lavoie

If you answered yes to the questions above, it’s time to find a partner you can trust. With the right partner, you can gain the knowledge, skills, and expertise required to optimize your financials and reach the goals you have for your start-up.

Contact Lavoie today to learn how their experienced team of financial professionals can provide you with the support you need to successfully manage your finances. We have extensive experience supporting investment-backed companies.

Contact us online or by calling 704-644-0235.

Contact Lavoie
Due Diligence Checklist 101: What Venture Capitalists Need to Know

Due Diligence Checklist 101: What Venture Capitalists Need to Know

by | Feb 23, 2023 | Accounting, Startups

Before investing in a company, venture capitalists run what is called a due diligence checklist. This is a rigorous process that looks closely at all aspects of a company, including its legal, financial, and human resources status. By performing a thorough review of the company, investors can move forward with their investment with confidence.

Additionally, the due diligence process helps investors gauge the potential risks and rewards of the investment. If the due diligence results are sound, usually the investors will move forward.

To help you understand exactly what company details are reviewed closely, we discuss each part of the checklist.

What is Due Diligence?

Venture capitalist firms use due diligence to ensure that potential investments are sound and will generate a good return. This process allows venture capitalists to evaluate the potential risks and rewards associated with any given investment, as well as gain a better understanding of the company and its operations.

This process looks at a variety of sources, including the company’s financial documents, legal documents, market research, and other related material. Additionally, venture capitalists may consult with experts such as lawyers, tax advisors, and industry analysts to gain a better understanding of the company and its prospects.

Ultimately, due diligence can help venture capitalists make informed decisions about which investments to pursue.

Types of Due Diligence

Venture capitalists will look at more than just a company’s financials to get a comprehensive view of the company’s standing.

Financial Due Diligence

Financial due diligence is a process in which an independent third party reviews the financial records and operations of a company to assess its value, financial strength, and potential risks. The goal is to provide an informed opinion on the company’s financial position and future prospects. It is typically conducted prior to a merger, acquisition, or other business transaction.

This step looks at the market, top competitors, required permits or permissions, and who the company can or can’t conduct business with.

Regulatory Due Diligence

Regulatory due diligence evaluates a company’s compliance with applicable laws and regulations. Existing shareholders, certificates of incorporation, existing contracts and/or arrangements, and other rights pertaining to the company capital are all examples of what investors will evaluate. A look into these areas makes sure that any investment made in the company will be in compliance, especially if the company has had any previous legal disputes.

Tax Due Diligence

Tax due diligence is a process of assessing the tax compliance of a company by reviewing tax laws, tax returns, and audits. Venture capitalists use it to guarantee that any investments they make follow tax regulations and that the company’s taxes are being paid properly.

Tax due diligence gives investors greater insight into the tax implications of their investments and identifies any potential liabilities.

Legal Due Diligence

Legal due diligence evaluates a company’s compliance with legal requirements, again, to make sure everything is compliant with regulations. Investors will look at shareholder resolutions, a certificate of incorporation, previous capital charges, and any contracts that could be terminated. Legal due diligence helps identify any potential issues that could affect the investment.

Intellectual Property Due Diligence

Intellectual property due diligence is a process of assessing the patents, copyrights, and trademarks held by a company. It ensures that investments don’t violate existing intellectual property rights and helps identify any potential IP issues that could affect the investment.

Information Technology Due Diligence

Information technology due diligence evaluates a company’s IT systems, processes, and procedures, as well as if the company is exposed to cybersecurity risks. Venture capitalists use it to ensure that any investments they make are supported by a strong IT infrastructure.

Human Resources Due Diligence

Human resources due diligence is a process of evaluating a company’s human resources policies and procedures, including its workforce mix, benefits, salaries, and bonuses. It’s not uncommon for investors to request organizational charts, stock options, and benefits packages, the details of past disputes with employees, and contact information with all third-party vendors.

Operational Due Diligence

Operational due diligence is a process of evaluating a company’s operations, including current processes, supply chains, logistics, procurement efficiencies, and risk management. Venture capitalists use it to make certain that the business is running well and can support any future investments.

Risks of Not Performing a Complete Due Diligence Check

If venture capitalists fail to use a due diligence checklist, they may expose themselves to unnecessary risks with costly outcomes. Without a thorough review of the company’s financial records, management team, industry trends, competitive landscape, and other operational matters, the venture capitalist may not have a full understanding of the company and its prospects. This can lead to poor decisions and a potential loss of funds. Additionally, it can increase the risk of legal and financial issues associated with the investment.

In Summary

The due diligence process is one of the most important steps that venture capitalists take, and working with a financial partner like Lavoie, can ensure the due diligence findings are as accurate as possible.

An outsourced accounting firm like Lavoie has the resources and expertise to evaluate the potential company’s financial statements and financial health and provide guidance on potential risks and rewards associated with the investment. Additionally, a venture capitalist accounting company can provide advice on tax liabilities and other financial matters associated with the investment.

Consult with Lavoie to prepare for your upcoming investment. Contact us online today.

Contact Lavoie
How Outsourced Accounting Benefits Your Private Equity Clients

How Outsourced Accounting Benefits Your Private Equity Clients

by | Feb 13, 2023 | Accounting, Outsourcing

Today, more than half of market private equity firms use an outsourced accounting partner, and for a good reason. Working with a financial operations management and outsourced accounting firm benefits both your firm and your clients.

Jump Ahead

In the sections below, we’ll explain how a financial planning and accounting firm can help you.

Instill Confidence in Your Investors

Investors like funding good ideas, but only if they know an experienced team will manage that good idea to its full potential.

Investors will be looking at how well your team works as individuals and as a group before trusting your firm to source, negotiate, monitor, and exit fund investments.

So, when meeting with potential investors, you want your team laser focused and ready to answer every question investors throw your way, like:

  • How forward-thinking is your team on issues that impact private equity?
  • How comfortable is the team managing a complex portfolio like mine?
  • Describe the technology you use to implement proactive portfolio strategies.
  • How quickly can the team produce high volumes of customized reports?

Your team’s biggest barriers to making a good impression?

 

Admin Distractions

If your team has to manage basic accounting tasks or stay on top of regulation changes, their focus will be split between essential and non-essential business functions.

An unfocused team has a greater risk of delivering reactive and lackluster strategies or accruing costly regulator penalties.

 

Disorganization

When your team doesn’t have a central platform to store, view, and extract financial data, it’s easy for teams to mistakenly (and unknowingly) work off of inaccurate or dated information. Without a centralized location to store client data, your team is more likely to stumble over unnecessary redundancies and inefficiencies.

By outsourcing your firm’s financial operation management and accounting, you let your fund admins focus on improving investment strategies, reports, and client dashboards – tasks that have a direct impact on the business.

Furthermore, your team will all be able to leverage accurate data, the bedrock of effective and proactive investment strategies.

Preserve Your Reputation to Attract Investors

 As private equity firms grow, it gets more difficult to maintain a high growth rate. But a high growth rate is exactly what attracts investors.

In response, private equity firms are eager to find efficiencies and cost savings that don’t impact core business functions.

Outsourcing your financial and accounting processes is an excellent way for firms to reduce overhead costs while maintaining transparency and accuracy. Plus, private equity firms can still maintain management fees this way.

Additionally, you can retain a penalty-free track record by relying on your financial partner to monitor regulatory changes and how they impact your business. Plus, your financial partner can make sure your firm is always audit-ready.

Broaden Your Expertise

The very best outsourced accounting firms are the ones that can explain the meaning behind the numbers.

At Lavoie, we go a step further by also identifying:

  • The health status of all your client portfolios
  • New areas of revenue
  • Areas of growth opportunity
  • Areas of inefficiency
  • Important KPIs in your industry
  • Future cash-flow projects to help you plan your next steps

Think of a company like Lavoie as an extension of your team that you can tap when, for example, you don’t understand why cash flow is low when the business is performing. Your financial partner has both the time and experience to investigate the problem and deliver a list of actionable next steps.

Finally, there is a degree of credibility you can achieve with investors when they know that a professional team is overseeing all the nitty-gritty details of their investment. This also reassures investors that your team’s focus is on their funds.

Free Up Cash Flow to Reinvest in Teams & Tools

There is a multitude of ways to enhance the investor experience at your firm, but very few of them are free.

An important benefit of partnering with an outsourced financial operations management and accounting firm is that it can free up more cash flow. This allows you to reinvest in other things such as team training, hiring new team members, or purchasing industry-leading tools.

When private equity firms experience rapid growth, they are suddenly inundated with heavy cash flow. A partner like Lavoie ensures that you can manage those funds efficiently.

Your financial partner can also manage your accounts receivable, allowing your company to collect payments faster or identify clients who are behind with payments.

They also have the time to carefully review invoices before they’re paid to check for any inaccuracies that can cost you.

The biggest cost savings come from not having to staff an in-house accounting team. With a financial partner, you only pay for additional financial support when you need it.

Meet Expectations of Digital-Savvy Investors & Regulators

Today’s most successful firms leverage the speed and accuracy of financial software to deliver superior client experiences and abide by current regulations.

All client investors expect financial transparency and accuracy and – with the emergence of technology – they expect them at a moment’s notice.

The Securities and Exchange Commission (SEC) also expects greater transparency and accuracy. The surge in private investments, plus the fact that private companies aren’t required to file information with local regulators, drew enough attention for the SEC to tighten regulations.

Today, regulators are more likely to request a report on performance or economic activity. All signs point to more regulations, re-emphasizing the importance of accessing financial information at a moment’s notice.

Financial software could easily alleviate these issues — but the software can’t do all the work by itself. Someone from your firm has to research and select the right product, learn the tool, and train other employees.

Realistically, private investors do not have enough time to do this, but the good news is that they don’t have to. Not when they partner with a financial operations management and accounting firm.

At Lavoie, for example, we make software recommendations to our clients based on the functionalities they need. We are proficient with several programs that satisfy a range of bookkeeping and accounting needs.

We also:

  • Set up the software for you
  • Create custom dashboards for your clients
  • Show you how to maximize the tool in ways that add value to your strategy

In Summary

Private equity firms of all sizes can glean deeper insights at a faster pace and with greater accuracy when they have the support of a financial operations management and an outsourced accounting firm.

 

Firms like Lavoie can reduce operational costs, streamline inefficiencies, and introduce your team to the right software. The resulting improvements in accuracy, communication, and transparency will only enhance the client experience at your firm.

If you’re a private equity firm looking for financial support, contact Lavoie today!

Contact Lavoie
The Best Budgeting Methods for Your Business

The Best Budgeting Methods for Your Business

by | Jul 6, 2022 | Accounting, Blog, Budgeting

From software developers to capital investors, most business professionals understand that budgeting is vital for sustainable growth. But few understand that a company’s budgeting methodology can make the difference between financial success and ruin.   

 In this article, we discuss four traditional types of budgeting. Then, we offer insight into driver-based budgeting – an innovative and flexible technique that allows companies to focus on factors that directly influence future success. 

Contents

What Are the Traditional Types of Budgeting?

The Problem With Conventional Budgeting Methods

How Driver-Based Budgeting Works

Why Savvy Business Owners Opt For Driver-Based Budgeting

Why Your Company Needs Driver-Based Budgeting Software 

What Are the Traditional Types of Budgeting?

Many companies follow traditional budgeting approaches, including: 

  • Incremental budgeting 
  • Activity-based budgeting
  • Zero-based budgeting
  • Value proposition budgeting

Each methodology has unique advantages as well as downfalls.   

Incremental Budgeting

This popular budgeting technique involves using the current budget as a starting point for next year’s budget. From there, you can adjust specific line items.   

 A cost of living raise may equate to a 2.5% increase in personnel spending, for example. Or, a merger may lead to a 4% reduction in production costs. 

Though incremental budgeting provides funding stability, it can also contribute to unnecessary spending. 

Pros

  • Straight-forward and easy to understand; no complex calculations are required
  • Budgets remain consistent over time
  • Less internal conflict; departments know what to expect from year to year

Cons

  • May lead to unnecessary spending; departments feel compelled to spend all the money in their budget
  • Doesn’t account for unforeseen or external factors
  • Leaves little room for innovation or creativity 

Activity-Based Budgeting

Activity-based budgeting is a top-down approach. Companies start with a key business objective and then ask, “What must we do to accomplish this goal?” Resources are allocated thusly.   

For example, if the goal is to generate $6 million in revenue from a new product line, an organization may decide to increase its personnel budget to hire more sales representatives.    

Though activity-based budgeting helps companies make goal-centric decisions, it can be tedious and time-consuming. 

Pros

  • Allows companies to focus on factors that influence the bottom line 
  • Company leadership is more likely to identify budget inefficiencies
  • Affords flexibility; changes can be made in response to internal and external events

Cons 

  • Time-consuming and expensive
  • Can lead to short-term thinking in pursuit of annual goals
  • May be difficult for younger companies to implement

Zero-Based Budgeting

Zero-based budgeting starts with a blank slate. Every year, department heads must create a budget from scratch, justifying each line item without reference to the prior year’s numbers.    

This budgeting approach is an excellent way to eliminate wasteful spending as it allows company leaders to aggressively cut fat while prioritizing key activities. 

However, zero-based budgeting is very time-consuming. 

Pros

  • Streamlines inflated budgets
  • Holds department heads responsible for costs 
  • Helpful during restructuring   

Cons

  • Incredibly time-consuming and frustrating for department heads
  • May reward short-sighted decision-making rather than big-picture thinking

Value Proposition Budgeting

Value proposition budgeting is a happy medium between incremental budgeting (which, some argue, is too blasé) and zero-based budgeting (which, some argue, is too scrupulous).   

 

The approach involves evaluating each line item by asking:  

  • Why are we spending this money?
  • What value does this provide to our stakeholders, customers, and employees?
  • Does the value outweigh the cost?

Though value proposition budgeting is useful for cutting wasteful spending, it can be difficult to operationalize “value” (i.e. what’s valuable to one person may not be valuable to another).   

Pros

  • Allows leaders to identify expenses that bring little to no value to the organization
  • Keeps companies customer-centered
  • Great for cutting wasteful spending 

Cons

  • “Value” is hard to operationalize 
  • Perceived value may change based on cultural, social, economic, or technological influences beyond the company’s control  

The Problem With Conventional Budgeting Methods 

While each traditional budgeting type has clear advantages, these methods are rigid, making it challenging for companies to pivot in response to a rapidly shifting economy.     

By contrast, driver-based planning is innovative and flexible. This type of forecasting allows companies to focus models on key drivers that directly influence financial success.   

Simply put, this top-down approach helps businesses focus on the metrics that actually matter.   

How Driver-Based Budgeting Works

Implementing a driver-based model involves four high-level steps.

Step 1: Identify Qualitative Goals

As with all budgeting, driver-based planning begins with an overarching goal. Your company may, for example, aim to drive revenue growth or increase profitability. 

Step 2: Isolate Quantitative KPIs

After determining a qualitative goal, your team should work to identify key performance indicators (KPIs). These quantitative metrics can be used to gauge progress. 

Step 3: Define Key Drivers

Now, your business must define the key drivers that have the most significant impact on its KPIs. Examples include website traffic, product price, and call volume.

Step 4: Create Your Model

Finally, you need to develop a mathematical model that investigates the relationship between the key drivers and your overarching goal.  

 This model should allow you to survey different scenarios. For example, you may want to explore how net profits will change in the wake of a 2% product price increase.

What Key Drivers To Select for Your Model

Key drivers vary from business to business. However, they generally fall into one of five categories:

  • Cash
  • People
  • Profit
  • Growth
  • Assets 

Typically, key drivers are controllable. They are inputs that companies can easily manipulate, such as the number of sales personnel. 

Why Savvy Business Owners Opt For Driver-Based Budgeting

Most traditional budgeting techniques force company leadership to slog through unnecessary information. But with driver-based budgeting, executives can break through the noise – concentrating on the key drivers that affect the bottom line.  

Efficiency and Effectiveness 

With driver-based planning, your business can focus on the variables that impact organizational success.

Flexibility 

Using a driver-based model, teams can quickly assess how different scenarios may affect financial outcomes. 

Operational Alignment

A driver-based approach encourages collaborative thinking across departments. 

Data Integrity

A driver-based model allows companies to collect a smaller amount of more accurate and valid data. 

Why Your Company Needs Driver-Based Budgeting Software

Driver-based models help companies explore the causal relationships between key drivers and financial outputs. These models also afford visibility, allowing businesses to run different scenarios and explore what may happen in the wake of future changes.   

However, building a driver-based model in a spreadsheet can be very time-consuming. Large spreadsheets also struggle to handle the macros and equations needed for these models. 

Fortunately, there’s a better way. Driver-based financial planning and analysis (FP&A) software can provide the state-of-the-art budgeting and forecasting solutions you need to catalyze your business. 

Lavoie CPA and Jirav Software Solutions

At Lavoie CPA, our goal is to deliver cutting-edge financial support so that clients can focus on soaring to greatness. With this in mind, we have partnered with Jirav, a driver-based financial planning tool.  

“Jirav affords the flexibility and visibility required to scale, focus, and grow a business.”

— Sharai Lavoie, CEO of Lavoie CPA

As our preferred FP&A software, Jirav gives companies the confidence to navigate complex business challenges. With forecasting, budgeting, reporting, and analytics, this all-in-one tool has everything you need to make your next big move. 

Contact Lavoie’s financial experts to see if Jirav is the right software solution for your business.

Contact us now
What Is Driver-Based Planning and How Can It Give Your Company a Competitive Edge?

What Is Driver-Based Planning and How Can It Give Your Company a Competitive Edge?

by | Jul 6, 2022 | Accounting, Small Business

Budgeting often leaves business professionals drifting aimlessly in a sea of details.

With so much information available, they struggle to determine which factors will propel their company forward and which will sink it altogether.

Fortunately, driver-based planning can serve as a beacon.

Intuitive and flexible, this budgeting technique allows companies to identify which factors have the greatest impact on financial performance. The budget is then built around these factors, also known as key drivers.

The result? A nimble and responsive budget that eliminates white noise by focusing on variables that actually move the needle.

Keep reading for more insight into this innovative budgeting technique.

Jump Ahead

What Is Driver-Based Planning?

Traditional budgeting methods focus heavily on details that have little impact on the bottom line. Comparatively, driver-based planning focuses on key drivers that are vital to a business’s financial performance and future success. 

Though key drivers vary from industry to industry, common examples include:

  • Call volume 
  • Quantity Produced
  • Product price

With driver-based planning, organizations can create models that explore the causal relationships between key drivers and financial outcomes. These models can then be used to make operational decisions. 

Driver-Based Planning in Action

At its simplest, driver-based planning helps businesses bridge the gap between budgeting and everyday operations. 

Your company can implement this forecasting technique in four steps.

Step 1: Identify Qualitative Goals

Much like in traditional budgeting, a driver-based model begins with an understanding of what your company hopes to accomplish. 

This goal doesn’t need to be overly complicated or even very specific. It can be as simple as “drive revenue growth” or “increase profitability.”

Step 2: Establish Quantitative KPIs  

After determining your high-level qualitative goal, map out how you will measure success. For most companies, this involves establishing key performance indicators (KPIs). 

Common examples of KPIs include net profit, operational cash flow, and inventory turnover.  

Step 3: Isolate Key Drivers

Now, your company must determine which factors – or key drivers – have the greatest impact on those KPIs. 

Hundreds of variables may affect a company’s bottom line. The objective is to isolate those that matter the most. 

Step 4: Develop the Model

The last step is to create a quantitative model based on your company’s key drivers. But a successful driver-based model can take days, if not weeks, to develop in a spreadsheet. 

Fortunately, financial planning and analysis (FP&A) software can minimize legwork while delivering a more precise and accurate forecasting system.  

Selecting Key Drivers With Momentum

Driver-based planning is grounded in the Pareto Principle. 

Also known as the 80/20 Rule, the Pareto Principle states that 80% of outcomes come from 20% of causes. In layman’s terms that means your company’s financial performance hinges on a handful of inputs.  

Determining which inputs – or key drivers – are worth your attention can be challenging. However, key drivers should be easy to manipulate. In other words, your company should be able to control key drivers with a high level of accuracy. 

For example, the number of sales representatives can easily be increased or decreased. However, the sales representative attrition rate is less predictable and harder to change.

Why Businesses Are Adopting a Driver-Based Approach

An increasing number of companies are moving away from traditional models and toward the driver-based approach. 

Why? Because this innovative methodology has clear advantages over the budgeting techniques of yesteryear. 

1. Driver-based planning puts the focus on key metrics that impact organizational success.  

Traditional models adopt a bottom-up approach, forcing the C-suite to wade through irrelevant information. But with a driver-based model, businesses can drill down on the metrics that actually matter. 

2. Driver-based models allow teams to quickly assess the impact of internal or external changes. 

In a rapidly shifting economy, the ability to pivot on a dime is invaluable. Luckily, driver-based plans allow companies to manipulate variables, run different scenarios, and determine how imminent changes could impact the bottom line. 

3. Driver-based approach nurtures operational alignment. 

Driver-based models link financials to the everyday activities of your company. This encourages finance professionals to collaborate with department heads to truly understand which inputs are linked to improved performance. 

4. Driver-based models ensure data integrity. 

The sheer volume of information associated with traditional models contributes to inaccuracies. But with driver-based planning, companies can focus on collecting a small amount of accurate, valid data. 

5. Driver-based planning helps stakeholders see the big picture.   

The chief advantage of driver-based planning is simplicity. This budgeting approach allows your company to explain – in plain language – the causal relationships between key inputs and profitability to stakeholders.

How Driver-Based Financial Planning Tools Maximize Precision

Driver-based models can give companies a competitive edge by illuminating key drivers that affect the bottom line. 

However, building one of these models in a spreadsheet can be tedious, requiring days of work from even the savviest of finance professionals. Worse yet, most spreadsheets get bogged down by the macros and equations needed for these models. 

Luckily, there’s a better solution. Driver-based FP&A software can offer cutting-edge precision and customizable forecasting solutions with a single click.   

Lavoie CPA and Jirav Software Solutions

At Lavoie CPA, we are dedicated to delivering strategic support so that businesses can focus on what matters most: catalyzing growth. With this in mind, we have partnered with Jirav, a driver-based financial planning tool, to help clients soar to greatness. 

“Jirav gives business professionals the clarity needed to make their next big move.”

— Sharai Lavoie, CEO of Lavoie CPA

As our preferred FP&A software, Jirav gives you a real-time look at financial projections. Rather than build budgets from last year’s stale data, you can rely on Jirav to help you visualize the future and test out different scenarios based on key drivers. 

Contact Lavoie’s financial experts to see if Jirav is the right software solution for your business. 

Schedule a Demo