Tag Archives | accounting

Margin vs Markup

See Also:
Gross Profit Margin Analysis
Retail Markup
Chart of Accounts (COA)
Margin Percentage Calculation
Markup Percentage Calculation

Margin vs Markup Differences

Is there a difference between margin vs markup? Absolutely. More and more in today’s environment, these two terms are being used interchangeably to mean gross margin, but that misunderstanding may be the menace of the bottom line. Markup and profit are not the same! Also, the accounting for margin vs markup are different! A clear understanding and application of the two within a pricing model can have a drastic impact on the bottom line. Terminology speaking, markup is the gross profit percentage on cost prices or cost of goods sold, while margin is the gross profit percentage on selling price or sales.

Effective Ways to Optimize Profitability

So, who rules when seeking effective ways to optimize profitability?. Many mistakenly believe that if a product or service is marked up, say 25%, the result will be a 25% gross margin on the income statement. However, a 25% markup rate produces a gross margin percentage of only 20%.


NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!

Download The Pricing for Profit Inspection Guide


Markup vs Gross Margin: Which is Preferable?

Though markup is often used by operations or sales departments to set prices it often overstates the profitability of the transaction. Mathematically, markup is always a larger number when compared to the gross margin. Consequently, non-financial individuals think they are obtaining a larger profit than is often the case. By calculating sales prices in gross margin terms they can compare the profitability of that transaction to the economics of the financial statements.

(Try the calculators at the bottom of the page to discover for yourself which is better!)

Steps to Minimize Markup vs Margin Mistakes

Terminology and calculations aside, it is very important to remember that there are more factors that affect the selling price than merely cost. What the market will bear, or what the customer is willing to pay, will ultimately impact the selling price. The key is to find the price that optimizes profits while maintaining a competitive advantage. Below are steps you can take to avoid confusion when working with markup rates vs margin rates:

Establish a Price

Still deciding whether to use margin or markup to establish a price? Easily discover if your company has a pricing problem and fix it with either margin or markup. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

margin vs markup, Effective Ways to Optimize Profitability

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Effective Ways to Optimize Profitability, margin vs markup

Margin vs Markup Chart

15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit

Margin Calculator

Markup Calculator

(Originally published by Jim Wilkinson on July 24, 2013)

83

Markup Percentage Calculation

See Also:
Margin vs Markup
Margin Percentage Calculation
Retail Markup
Gross Profit Margin Ratio Analysis
Operating Profit Margin Ratio Analysis

Markup Percentage Definition

Define the markup percentage as the increase on the cost price. The markup sales are expressed as a percentage increase as to try and ensure that a company can receive the proper amount of gross profit. Furthermore, markups are normally used in retail or wholesale business as it is an easy way to price items when a store contains several different goods. Now, look at the markup percentage calculation.

Markup is great. But if you aren’t intentionally pricing for profit, then you’re missing out on some opportunities for big improvements. Click here to download your free Pricing for Profit Inspection Guide now.

How to Calculate Markup Percentage

By definition, the markup percentage calculation is cost X markup percentage. Then add that to the original unit cost to arrive at the sales price. The markup equation or markup formula is given below in several different formats. For example, if a product costs $100, then the selling price with a 25% markup would be $125.

Gross Profit = Sales Price – Unit Cost = $125 – $100 = $25

Now that you have found the gross profit, let’s look at the markup percentage calculation:

Markup Percentage = Gross Profit/Unit Cost = $25/$100 = 25%

The purpose of markup percentage is to find the ideal sales price for your products and/or services. Use the following formula to calculate sales price:

Sales Price = Cost X Markup Percentage + Cost = $100 X 25% + $100 = $125

As with most things, there are good and bad things about using markup percentage. One of the pitfalls in using the markup percentage to calculate your prices is that it is difficult to ensure that you have taken into consideration all of your costs. By using a simple rule of thumb calculation, you often miss out on indirect costs.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

Markup Percentage Calculation Example

For example, Glen started a company that specializes in the setup of office computers and software. He decided that he would like to earn a markup percentage of 20% over the cost of the computers to ensure that he makes the proper amount of profit. Furthermore, Glen has recently received a job to set up a large office space. He estimates that he will need 25 computers at a cost of $600 a piece. In addition, Glen will need to set up the company software in the building. The cost of the software to run all the computers is around $2,000. If Glen wants to earn the desired 20% markup percentage for the job, then what will he need to charge the company?

(Looking for more examples of markup? If so, then click here to access a retail markup example.)

Step 1

First, Glen must calculate the total cost of the project which is equal to the cost of software plus the cost of the computers. Find the markup percentage calculation example below.

$2,000 + ($600*25) = $17,000

Step 2

Then, Glen must find his selling price by using his desired markup of 20% and the cost calculated for the project. The formula to find the sales price is as follows:

Sales Price = (Cost * Markup Percentage) + Cost
or
Sales Price = ($17,000 * 20%) + $17,000 = $20,400

In conclusion, Glen must charge the company $20,400 to earn the return desired on cost. This is the equivalent of a profit margin of 16.7%. For a list of markup percentages and their profit margin equivalents scroll down to the bottom of the Margin vs Markup page, or you can find them using the above markup formula. Using what you’ve learned the markup percentage calculation, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.

markup percentage calculation, Markup Percentage

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

markup percentage calculation, Markup Percentage

(Originally published by Jim Wilkinson on July 24, 2013.)

122

Pitfalls to Avoid When Growing Your Business

A strong economy drives business growth. I think most of us can agree on that. Growth is usually good…

But if it is not controlled growth, it simply will not be sustainable.

In this blog, I outline several pitfalls to avoid when growing your business (especially in a high growth scenario). It’s all about managing the growth properly.

We have two current clients that are experiencing high growth, and they can barely make payroll.

With a pipeline of huge sales, how can this be possible…?

Their lack of planning on systems and procedures has also caused the management to not sleep well at night.

SCFO Lab Members: The reason most income statement projections fail is because of a lack of ability to accurately project sales! Start the Sales Genie EP now.

What Happens in a High Growth Scenario?

So, what happens in a high growth scenario? It should be all good news… The problem is that many times the decision maker(s) of a high growth company have never experienced high growth. Sometimes, these can be startups or a business that developed a new product.

If you have not experienced it, then it really is hard to imagine all the things that can take place.

Example of a High Growth Scenario

Let’s look at an example of a high growth scenario in a made-up company…

You are a manufacturer of widgets and you own a manufacturing facility. You have 50 employees before the company is about to explode in growth.

Your VP of Business Development or VP of Sales brings you new contracts that will significantly change the size of your company.  These contracts will double, triple, or even quadruple your business in the next 18-24 months.

So no worry about generating sales….

But there are several questions that need to be asked and pitfalls to avoid in this company.

Pitfalls to Avoid When Growing Your Business

Inventory: How are you going to fill all those orders?

You need to purchase a lot of inventory of raw material. In addition, your purchasing transactions just tripled in dollars and quantity. Finally, you have enough machines to manufacture items for the next 12 months… But next year, you will need to acquire more machines to keep up with demand.

Labor: What about labor?

The purchasing person is working already 50 hour weeks, and you know you will need to hire another purchasing person. Your plant labor needs to increase to compensate with the increased workload.

Right now, your 3 person accounting team includes 2 bookkeepers and a controller. You realize you need a cost accountant.

Systems, Process and Procedures

You have used a basic accounting system for 10 years, but you realize that you have outgrown the accounting system. It is not the right system because it does not handle cost accounting or standard costs. You want to integrate purchasing and inventory modules.

For years, you kept inventory and work-in-process on spreadsheets. Now, the dozens of spreadsheets are not reconciling. It’s time to automate inventory.

The once per year physical count of inventory is no longer enough. You need to have cycle counts and maybe at least a full physical count quarterly.

For years, you have operated informally, but you now you realize you need to have written policies and procedures.

Accounting

You have run your business on a hybrid cash/accrual system, never really got to full accrual accounting, and never really worried about GAAP financial statements. Maybe you should…

You never considered having your financial statements audited; however, with all this growth, you might sell one day. Having your financial statements audited would add value to your business.

Your company is growing so much, you need more than financial statements that tell you what happened in the past. Now, you need projections, budgets, and dashboards.

It’s time for a strategic financial partner. It’s time for a CFO.

Click here to access our Goldilocks Sales Method, and learn how to build your sales pipeline and project accurately.

Human Resources

Your admin person that did a great job all these years is now dealing with 3 or 4 times as many employees. It’s time to hire someone that has a good understanding of labor laws.

Payroll was done in house. Now with so many hourly people and manual time sheets, it’s time to upgrade and integrate payroll to the accounting system or have it outsourced.

Consider automated time keeping and get away from the multiple spreadsheets.

Legal and Tax

Your new sales take you out of State. Now, you are selling in 5 different States.

Have you created nexus in these other States? They have State taxes… Oops!

You had to hire a few people on the ground in the other States; your labor laws just got really complicated.

Sales and Use tax… Are you paying the correct taxes, not paying them, or over paying them?

You developed a new process or Intellectual Property (“I.P.”). Did you register this? Did your attorney suggest maybe creating a new legal entity that has the I.P.?

By creating the new legal entity or new legal entities, did you realize you just created a lot of complex accounting work by having all those legal entities?

Note: We recently had a client that created 19 legal entities because their attorney wanted to “protect” them from everything. Now, they had to consolidate all those entities with hundreds of intercompany transactions.

What is your Exit Strategy?

You will be quadrupling the size of your business in the next 2-3 years. You thought to yourself one day… I might want to sell this business.

What does it take to sell your larger company?

It takes time to set a strategy for an exit. It takes time to “professionalize” management and your back office.

Do you have a succession plan so that the business does not look like a one man show?

Do you have a 3-year budget with projections?

SCFO Lab Members: If you want to build your exit strategy and/or access your readiness for market, check out the Exit Strategy EP

How to Have Sustainable High Growth

I have hit on some of the basic topics that come up in a high growth scenario. There are many more things to consider.

The first thing that comes to mind is how are you going to pay for all this?

Do you have sufficient working capital?

Sometimes, you can manage working capital and have sustainable growth.

Many times, you need some sort of financing because of the timing differences in working capital. You cannot afford to sustain this high growth with out the financing.

Cash and working capital are key to the sustainable growth.

But just as important is having the right people. Not just having the right people on the bus… But having them in the right seat on the bus is critical. Not everyone is meant to sit in the same seat in a larger company. This applies to the management team as well as employees.

I have actually seen situations in high growth companies where the person that really needed to be fired was the owner or CEO.  Because the CEO of a $5 million dollar company is not necessarily the same CEO of a $50 million dollar company.

Don’t get me wrong… The ownership does not have to change. You can still own the business. But that does not mean you need to be an employee running the business.

Summary

In order to have sustainable high growth that will allow you to sleep well at night consider the above items but you must have the following…

  • Enough working capital
  • The right people in the right seats “on the bus”
  • More and different systems, process, and procedures
  • A strategic plan that will allow you to have a sustainable bigger company

Projections are a helpful way to grow sustainably and avoid an uncontrollable high growth scenario. Download our free Goldilocks Sales Method to start building your pipeline and projecting accurately.

Pitfalls to Avoid When Growing Your Business

Pitfalls to Avoid When Growing Your Business

2

Journal Entries (JEs)

See Also:
Double Entry Bookkeeping
Journal Entries For Factoring Receivables
Accounting Principles
Accounting Concepts
Adjusting Entries
Role of a Company Back Office

Journal Entries Definition

A journal entry is a recording of a transaction into a journal like the general journal or another subsidiary journal. Journal entries for accounting require that there be a debit and a credit in equal amounts. Oftentimes, there is an explanation that will go along with this to explain the transaction.

Journal Entries Meaning

A journal entry means that a transaction has taken place whether it is a sale to a customer, buying goods from a supplier, or building a warehouse. These transactions affect both the balance sheet and income statement.

As said before, journal entry accounting requires that there be an equal debit and credit for every transaction. This is also known as double entry bookkeeping. Many journal accounts have a normal balance. For example, assets have a normal debit balance if the account is increased and it is a credit if it is decreased.


Click here to download: The Smart Back Office for SMBs


Journal Entries Example

The following example will use both balance sheet and income statement accounts to show how they work.

Bill has been looking for a certain toy for his son. He walks into Toys Inc. to find it. After some searching, Bill finds a GI Joe for $14 and buys it to take home to his son. The toy cost Toys Inc. $9 to get the toy from its supplier. Thus, Toys inc. will record the following journal entries into the Sales Journal:

Cash………….$14

Sales Revenue…………..$14

COGS………….$9

Inventory…………………..$9

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If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Journal Entries

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Journal Entries

Originally posted by Jim Wilkinson on July 24, 2013. 

0

Standard Chart of Accounts

See Also:
Chart of Accounts (COA)
Problems in Chart of Accounts Design
Complex Number for SGA Expenses
Role of a Company Back Office

Standard Chart of Accounts

In accounting, a standard chart of accounts is a numbered list of the accounts that comprise a company’s general ledger. Furthermore, the company chart of accounts is basically a filing system for categorizing all of a company’s accounts as well as classifying all transactions according to the accounts they affect. The standard chart of accounts list of categories may include the following:

The standard chart of accounts is also called the uniform chart of accounts. Use a chart of accounts template to prepare the basic chart of accounts for any subsidiary companies or related entities. By doing so, you make consolidation easier.

Organize in Numerical System

Furthermore, a standard chart of accounts is organized according to a numerical system. Thus, each major category will begin with a certain number, and then the sub-categories within that major category will all begin with the same number. If assets are classified by numbers starting with the digit 1, then cash accounts might be labeled 101, accounts receivable might be labeled 102, inventory might be labeled 103, and so on. Whereas, if liabilities accounts are classified by numbers starting with the digit 2, then accounts payable might be labeled 201, short-term debt might be labeled 202, and so on.


Click here to download: The Smart Back Office for SMBs


Number of Accounts Needed

Depending on the size of the company, the chart of accounts may include either few dozen accounts or a few thousand accounts. Whereas, if a company is more sophisticated, then the chart of accounts can be either paper-based or computer-based. In conclusion, the standard chart of account is useful for analyzing past transactions and using historical data to forecast future trends.

You can use the following example of chart of accounts to set up the general ledger of most companies. In addition, you may customize your COA to your industry by adding to the Inventory, Revenue and Cost of Goods Sold sections to the sample chart of accounts.

SAMPLE CHART OF ACCOUNTS

Refer to the following sample chart of accounts. Each company’s chart of accounts may look slightly different. But if you are starting from scratch, then the following is great place to start.

1000 ASSETS

1010 CASH Operating Account
1020 CASH Debitors
1030 CASH Petty Cash

1200 RECEIVABLES

1210 A/REC Trade
1220 A/REC Trade Notes Receivable
1230 A/REC Installment Receivables
1240 A/REC Retainage Withheld
1290 A/REC Allowance for Uncollectible Accounts

1300 INVENTORIES

1310 INV – Reserved
1320 INV – Work-in-Progress
1330 INV – Finished Goods
1340 INV – Reserved
1350 INV – Unbilled Cost & Fees
1390 INV – Reserve for Obsolescence

1400 PREPAID EXPENSES & OTHER CURRENT ASSETS

1410 PREPAID – Insurance
1420 PREPAID – Real Estate Taxes
1430 PREPAID – Repairs & Maintenance
1440 PREPAID – Rent
1450 PREPAID – Deposits

1500 PROPERTY PLANT & EQUIPMENT

1510 PPE – Buildings
1520 PPE – Machinery & Equipment
1530 PPE – Vehicles
1540 PPE – Computer Equipment
1550 PPE – Furniture & Fixtures
1560 PPE – Leasehold Improvements

1600 ACCUMULATED DEPRECIATION & AMORTIZATION

1610 ACCUM DEPR Buildings
1620 ACCUM DEPR Machinery & Equipment
1630 ACCUM DEPR Vehicles
1640 ACCUM DEPR Computer Equipment
1650 ACCUM DEPR Furniture & Fixtures
1660 ACCUM DEPR Leasehold Improvements

1700 NON – CURRENT RECEIVABLES

1710 NCA – Notes Receivable
1720 NCA – Installment Receivables
1730 NCA – Retainage Withheld

1800 INTERCOMPANY RECEIVABLES

 

1900 OTHER NON-CURRENT ASSETS

1910 Organization Costs
1920 Patents & Licenses
1930 Intangible Assets – Capitalized Software Costs

2000 LIABILITIES

 

2100 PAYABLES

2110 A/P Trade
2120 A/P Accrued Accounts Payable
2130 A/P Retainage Withheld
2150 Current Maturities of Long-Term Debt
2160 Bank Notes Payable
2170 Construction Loans Payable

2200 ACCRUED COMPENSATION & RELATED ITEMS

2210 Accrued – Payroll
2220 Accrued – Commissions
2230 Accrued – FICA
2240 Accrued – Unemployment Taxes
2250 Accrued – Workmen’s Comp
2260 Accrued – Medical Benefits
2270 Accrued – 401 K Company Match
2275 W/H – FICA
2280 W/H – Medical Benefits
2285 W/H – 401 K Employee Contribution

2300 OTHER ACCRUED EXPENSES

2310 Accrued – Rent
2320 Accrued – Interest
2330 Accrued – Property Taxes
2340 Accrued – Warranty Expense

2500 ACCRUED TAXES

2510 Accrued – Federal Income Taxes
2520 Accrued – State Income Taxes
2530 Accrued – Franchise Taxes
2540 Deferred – FIT Current
2550 Deferred – State Income Taxes

2600 DEFERRED TAXES

2610 D/T – FIT – NON CURRENT
2620 D/T – SIT – NON CURRENT

2700 LONG-TERM DEBT

2710 LTD – Notes Payable
2720 LTD – Mortgages Payable
2730 LTD – Installment Notes Payable

2800 INTERCOMPANY PAYABLES

2900 OTHER NON CURRENT LIABILITIES

3000 OWNERS EQUITIES

3100 Common Stock
3200 Preferred Stock
3300 Paid in Capital
3400 Partners Capital
3500 Member Contributions
3900 Retained Earnings

4000 REVENUE

4010 REVENUE – PRODUCT 1
4020 REVENUE – PRODUCT 2
4030 REVENUE – PRODUCT 3
4040 REVENUE – PRODUCT 4
4600 Interest Income
4700 Other Income
4800 Finance Charge Income
4900 Sales Returns and Allowances
4950 Sales Discounts

5000 COST OF GOODS SOLD

5010 COGS – PRODUCT 1
5020 COGS – PRODUCT 2
5030 COGS – PRODUCT 3
5040 COGS – PRODUCT 4
5700 Freight
5800 Inventory Adjustments
5900 Purchase Returns and Allowances
5950 Reserved

6000 – 7000 OPERATING EXPENSES

6010 Advertising Expense
6050 Amortization Expense
6100 Auto Expense
6150 Bad Debt Expense
6200 Bank Charges
6250 Cash Over and Short
6300 Commission Expense
6350 Depreciation Expense
6400 Employee Benefit Program
6550 Freight Expense
6600 Gifts Expense
6650 Insurance – General
6700 Interest Expense
6750 Professional Fees
6800 License Expense
6850 Maintenance Expense
6900 Meals and Entertainment
6950 Office Expense
7000 Payroll Taxes
7050 Printing
7150 Postage
7200 Rent
7250 Repairs Expense
7300 Salaries Expense
7350 Supplies Expense
7400 Taxes – FIT Expense
7500 Utilities Expense
7900 Gain/Loss on Sale of Assets

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standard chart of accounts

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

If you want to take your company and yourself to the next level, then click here to learn more about the premier financial leadership development platform.

standard chart of accounts

Originally posted by Jim Wilkinson on July 24, 2013. 

60

Payroll Accounting

See also:
Commission Accounting
PEO Arrangement Compared to Outsourcing Payroll
Direct Labor
Pension Plans
Federal Unemployment Tax Act (FUTA)
Outsourced Accounting Services

Payroll Accounting

Payroll Accounting is the function of calculating and distributing wages, salaries, and withholdings to employees and certain agencies. It is generally done through different documents such as time sheets, paychecks, and a payroll ledger. Payroll Accounting also involves the process of issuing reports to upper management, so that they are able to make informed decisions about the company’s labor-cost data.

Payroll Accounts

Below are some payroll basic accounts that are used in association with accounting payroll entries as well as a description of each one and the relevance towards payroll.

Assets

Cash is the petty cash account which is used to empty the accrued payroll account when the payroll is distributed to the company’s employees.

Liabilities

Accrued Payroll represents a liability calculated by taking the gross pay and subtracting all deductions, or the amount that is due to the employees.

Federal Income Taxes Withheld

This account serves as a deduction from the gross pay or payroll account. It is an accumulation of payroll taxes as a percentage amount which is due to the U.S. Government. Payroll tax rates differ from business to business.

Federal Insurance Contributions Act (FICA) Taxes Payable

The FICA Taxes Payable represents a liability that is due to the U.S. Government. It is then used to fund institutions like Medicare and the Social Security Administration.

Insurance Withheld

Insurance withheld is another deduction from the gross pay and represents a contribution to the employee’s insurance provided by the employer.

Note: Other voluntary payroll deductions and withholdings can be present like bond or stock withholdings that a company would use for investments on the employee’s behalf. Other deductions include union dues or pension funds that the company may hold for its employees.

Expenses

The payroll account is the gross pay that is calculated by a payroll accountant (i.e. the salary payment or the hourly rate times the number of hours worked).

Payroll Accounting Journal Entries

This is a typical accounting payroll example of journal entries when a company is calculating and distributing the payroll.

Account                           Dr.               Cr.

Calculation:
Payroll                           xxxx

Federal Income Taxes Withheld                       xxxx

FICA Taxes Payable                                  xxxx

Union Dues Withheld                                 xxxx

Bond Withholdings                                   xxxx

Accrued Payroll                                     xxxx
Distribution:
Accrued Payroll                   xxxx
Cash                                                xxxx

Payroll Accountant Duties

Oftentimes, companies outsource their payroll accounting to specialized firms. These firms can perform the same function for a much lower cost than if the company generated them in-house.


Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs


There are six major job functions that the payroll department or specialized company must perform throughout the year, including the following:

1)  Compute gross pay (hourly or salary)

2)  Compute the total amount of deductions (FICA, taxes, etc.)

3)  Calculate the total amount due to employees i.e. the gross pay minus the amount of deductions.

4)  Authorize the amount of payments due to employees.

5)  Distribute the payroll once authorized.

6)  Issue reports to upper management concerning labor-cost data.

Accounting Payroll System

In the past, accounting payroll systems consisted of two journals. The first is the payroll journal. Then, the second is the payroll disbursements journal. Companies used the payroll journal to accrue for salaries and wages towards employees as well as government obligations withheld from the employee’s paycheck. Thus, companies used disbursements journal to pay off these accumulated accruals when they became due.

But thanks to computer systems like Peachtree and Quickbooks, they have combined both of these journals into a payroll ledger. Furthermore, you can outsource these payroll functions at a lower cost and efficiency for a company.

Guide to Outsourcing Your Business's Bookkeeping and Accounting


Payroll Accounting

Originally posted by Jim Wilkinson on July 24, 2013. 

0

The Future of the Accounting Workforce

See Also:
Accounting Income vs Economic Income
Accounting Fraud Prevention using Quickbooks
Accrual based Accounting
American Institute of Certified Public Accountants
Auditor

The Future of the Accounting Workforce

Firms who are hiring new accountants or accounting majors have to understand where the newer generations are “coming from,” as a Boomer (born 1946-1964) might say, to target a style that will bring out the next generation’s (the Millennial Generation’s) strengths and maximize their effectiveness. This involves discarding biases and preconceived notions and enjoying our generational differences—and similarities! The future of the accounting workforce is dramatically shifting as we learn more about the different generational preferences and work ethics. The rapid spread of information, more technology, and a culture that is changing faster than ever before will continue to shape the future of the accounting workforce.

A Shift in the Accounting Workforce

There is a shift in the accounting workforce occurring as Baby Boomers continue to retire and Millennials take over management roles in companies. Millennial workers grew up in a technology-driven world. The way we do business has changed dramatically over the last 2-3 decades. As a result, they often operate under different perspectives than older workers do. Companies across North America that recognize that the differentiator is their people will emerge as winners in the battle for talent; therefore, they’ll design specific techniques for recruiting, managing, motivating, and retaining them.

Another thing we are seeing in this accounting workforce shift is outsourcing the bookkeeping of the accounting department.


Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs


Retirement of Baby Boomers

A notable demographic shift began in 2011 when the oldest Baby Boomers (b. 1946) hit the United States’ legal retirement age of 65. As Boomers continue to retire members, Generation X will take roles in middle and upper management, and, Millennials will take management positions in the workforce. That process has already begun since some members of Millennials in their mid 30s (if we use 1982 as the beginning of the Millennial generation).

Convergence of 3 Generations in 1 Workplace

Other scenarios that will become commonplace will include experienced Boomers reporting to Millennials, members of all 3 generations working side-by-side on teams, and, Millennials calling on Gen X clients. And, all this is going to happen while 3 generations (the Boomers, Gen Xers, and Millennials) continue the process of finding a way to get along in an uncertain workplace.

This has made all the more interesting given the gap between these two generations. For example, Gen Xers complain that the Millennials are indulged, self-absorbed, and overly optimistic, while Millennials charge that Gen Xers are cynical, aloof and don’t appreciate fresh ideas and idealism.

The Generational Gaps

A survey of 2,546 HR professionals (mostly Gen Xers with all 3 generations represented) across all industries (“Millennials at Work”) was conducted between June 1 and June 13, 2007. The results indicated that there were pronounced generational gaps in communications styles and job expectations in the workplace:

  • 49% of employers surveyed said the biggest gap in communication styles between Millennials workers and other workers is that Millennials communicate more through technology than in person
  • 25% said they have a different frame of reference
  • 87% said that Millennials feel more entitled in terms of compensation, benefits and career advancement than past generations
  • 73% of hiring managers and HR professionals ages 25 to 29 (Millennials) share this sentiment

Some of the examples of this behavior provided by the employers taking the survey included the following:

  • 74% said Millennials expected to be paid more
  • 61% said Millennials expected to have flexible work schedules
  • 56% said Millennials expected to be promoted within a year
  • 50% said Millennials expected to have more vacation or personal time
  • 37% said Millennials expected to have access to state-of-the-art technology
  • 55% said that Millennials have a more difficult time taking direction or responding to authority than older generations of workers did/do

Generational Preferences: Generation X and the Millennials

So, what is the answer to this frustration? Simply that the 3 generations, especially the Gen Xers and the Millennials, begin to understand and respect each other….

Generation X

There are 51 million members of the Generation X (also known as the “latch-key kids”). These Gen Xers:

  • Were born between 1965 and 1976
  • Accept diversity
  • Are pragmatic/practical
  • Are self-reliant/individualistic
  • Reject rules
  • Mistrust institutions
  • Are politically correct
  • Use technology
  • Are able to multitask
  • Are friend-not family oriented

Gen Xers want a casual/fun/friendly work environment that allows them to be involved, offers flexibility and freedom. They also want an environment where they can continue to learn.

It is important to remember that Generation X grew up in a very different world than previous generations. Divorce and two income families created “latch-key” kids out of many in this generation – which led to traits of independence, resilience, and adaptability.

As a result, it is commonplace to meet Gen Xers who don’t want “someone looking over their shoulder” in a work (or social) environment. They want and are comfortable giving immediate and ongoing feedback, work well in multicultural settings, and take a pragmatic approach to getting things done.

Work Ethic of Gen X

Gen Xers have redefined loyalty after seeing their parents face layoffs and experiencing the recessionary period in the early 1980s when jobs were scarce and job security was poor. As a result, they are committed to their work, to the team they work with, and to their boss, but not necessarily the company they work for. Unlike the Baby Boomer generation which would complain about their job but accept it, Gen Xers send their resume out and accept the best offer they can find.

But that does not mean that Gen Xers do not take their employability seriously. Their career choices are flexible, and they are willing to move laterally, stop and/or start over in their careers. Instead of a career ladder, they have more of a career lattice.

Since Gen Xers dislike authority and rigid work requirements, a hands-off relationship is necessary, coupled with giving ongoing feedback on their performance (it is best to keep them informed of your expectations and the measures you will be using to evaluate their progress) and encouragement to be creative and show initiative in finding new ways to get the job done (in fact, Gen Xers work best when they’re told what the desired outcome is and then told to achieve it). They prefer to work “with” you, not “for” you, and are eager to learn new skills because they want to stay employable.

This is really different from the way to treat Millennials…

The Millennial Generation

Millennials (there are 75 million of them!) are also known as the “Internet Generation.” They:

  • Were born between 1977 and 1998
  • Celebrate diversity
  • Are optimistic/realistic
  • Are self-inventive/individualistic
  • Like to rewrite the rules
  • Want a killer lifestyle
  • Have an irreverence for institutions
  • Are able to multi-task at a rate faster than any prior generation
  • Are nurtured/nurturing
  • Treat friends as family/love family

Unlike Gen Xers, Millennials want a structured, supportive work environment, personalized work, and an interactive relationship with their bosses. This group is technically literate like no one else since technology has always been part of their lives. They are typically team-oriented, work well in groups, are accomplished multi-taskers, and are willing to work hard with structure in the workplace.

They acknowledge and respect positions and titles, and want a relationship with their boss. But this is something that many Gen Xers are not comfortable with, given their desire for independence and their preference for a hands-off style.

Millennials believe that their success will be linked to their ability to acquire as wide a variety of marketable skills as they can, and are looking for mentoring, structure and stability in the firm they work in. Thus, they like to be managed and coached in a very formal process. For example, they like set meetings and a boss who acts like their boss. They also like lots of challenges. Effective management of Millennials requires that you break down their goals into steps and give them the necessary resources and information they’ll need to meet the challenge. In fact, successful managers often mentor Millennials in groups since they work so well in team situations. They use the opportunity to act as each other’s resources or peer mentors.

Understand the Trends that Molded Millennials

To understand the Millennials, it is important to understand the trends of the 1990s and 2000s that molded their behavior:

  • Focus on children and family in the early 90s
  • Scheduled, structured lives as a result of parents and teachers micromanaging their schedules and planning things out for them
  • Multiculturalism – kids growing up in the 1990s and 2000s had more daily interaction with other ethnicities and cultures than ever before
  • Terrorism, Heroism and Patriotism – The bombing Federal Building in Oklahoma City the Columbine High School killings and, the terrorist attacks on September 11, 2001, and the heroes who emerged from these dark days, all affected them and galvanized their sense of patriotism
  • Parent Advocacy – the Millennials were raised by involved parents who did, and often still do, intercede on their behalf

These trends coupled with the consistent messages their parents gave and the school system reinforced had a profound effect on the generation as a whole. Messages they received included:

  • Be smart—you are special
  • Be inclusive and tolerant of other races, religions, and sexual orientations
  • Connect 24/7
  • Be interdependent—on family, friends, and teachers
  • Achieve now
  • Serve your community

Work Ethic of Millennials

All of this has translated into a generation of employees with a different work ethic that is different from their Gen X colleagues/bosses.

From a work ethic standpoint, Millennials:

  • Are confident and have a “can-do” attitude
  • Are optimistic and hopeful, yet practical
  • Believe in the future and their role in it
  • Expect a workplace that is challenging, collaborative, creative, fun, and financially rewarding
  • Are goal and achievement oriented
  • Think in terms of the greater good and have a high rate of volunteerism
  • Are inclusive

Millennial Liabilities and Assets

Millennials’ liabilities include a distaste for menial work, poor people skills when dealing with difficult individuals, a tendency to be impatient, a lack of experience, and over-confidence.

Include in their assets the following facts:

  • Multi-task effectively
  • Goal orientated
  • A positive attitude
  • Work well with others

In fact, they work and learn best in teams. They also thrive in a structured environment that offers experiential learning.

What do Millennials Want from Employers?

So, what do Millennials want from their employers? Millennial want their bosses to:

  • Be the leader – specifically to behave with honesty and integrity and to be good role models
  • Challenge them and to offer them challenging, learning opportunities with growth opportunities
  • Let them work with friends and positive people in a friendly environment
  • Respect them
  • Be flexible
  • Pay them well

So, what do we do with all this information? Well, we have been giving lip service to the concept of internal customer service, specifically treating employees with the same respect and attitude we do customers. Thanks to the new generation, that is about to change – at least in successful firms.

This meansmeetings needs to learn to meet their high expectations, listen to their ideas despite their lack of experience, learn to respond in a positive/respectable manner than a negative one, and embrace their knowledge of technology (and not feel threatened by it). Learn from them.

Ideas for Managing Millennials

Companies such as Procter and Gamble, Siemens and General Electric have set up tutoring for middle-aged executives and or reverse mentoring programs so their executives can better understand new technologies.

Other changes companies are making include offering:

  • Flexible work schedules
  • More recognition programs
  • More access to state-of-the-art technology
  • Ongoing education programs

Guide to Outsourcing Your Business's Bookkeeping and Accounting


Sources
http://www.abanet.org/lpm/lpt/articles/mgt08044.html Generation X and The Millennials: What You Need to Know About Mentoring the New Generations by Diane Thielfoldt and Devon Scheef, August 2004
http://en.wikipedia.org/wiki/Generation_Y Generation Y
http://www.brandchannel.com/start1.asp?id=156 Who’s filling Gen Y’s shoe’s? by Dr. Pete Markiewicz, May 5, 2003 issue
http://www.usatoday.com/life/lifestyle/2006-06-28-generation-next_x.htm The ‘millennials’ come of age, 6/29/2006
http://www.cbsnews.com/stories/2007/11/08/60minutes/main3475200.shtmlThe “Millennials” Are Coming, Morley Safer On The New Generation Of American Workers, Nov. 11, 2007
http://humanresources.about.com/od/managementtips/a/millenials.htm Managing Millennials: Eleven Tips for Managing Millennials, by Susan M. Heathfield,
http://top7business.com/?id=3023 Top 7 Keys to Managing Millennials in the Workplace by Gretchen Neels.
http://www.abc.net.au/news/stories/2007/07/13/1978431.htm Generation Y disappoints employers by Liv Casben
Connecting Generations: The Sourcebook by Claire Raines, published 2003.
Managing Generation Y by Carolyn A. Martin, Ph.D. and Bruce Tulgan, published 2001.
Generation X by Charles Hamblett and Jane Deverson, published 1965

Originally posted by Jim Wilkinson on July 23, 2013. 


Be prepared for how the changes expected in the accounting workplace. But there are a few recruiting strategies that are tried and true – through all generations. Learn what they are in our 5 Guiding Principles For Recruiting a Star-Quality Team whitepaper.

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