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Cash Basis vs Accrual Basis Accounting

Cash Basis vs Accrual Basis Accounting

Believe it or not, we deal with this issue of whether to use cash basis vs accrual basis accounting all the time. Many companies start from scratch with one person doing the accounting from home or a small office. Over time, their needs grow. It’s normal to see changes within the organization, especially when companies grow. As you grow, it is critical that you do not neglect the accounting process.

Cash Basis vs Accrual Basis Accounting

What is the difference between cash basis vs accrual basis accounting?

Cash basis accounting is, in its form, the most basic way of tracking your income and expenses based on the actual cash that comes in and goes out every day. Imagine the one employee/owner hot dog stand on the street corner. That business owner goes out early in the morning, pays $2 in cash to the vendor that sells him the hot dog meat and buns. Then, he goes out to the street corner and sells the hot dog for $3 in cash and puts the cash in his pocket. That vendor made $1 profit in cash from the sale of a single hot dog. He sells many hot dogs during the day. This business person is on a cash basis way of tracking his business. In this business owners company there is no difference in timing of transactions between periods.

Moving to Accrual Basis Accounting

If you are bigger than the hot dog stand, then you should probably consider moving to accrual basis accounting for capturing your transactions and accounting. Why? Because we live in an accrual world. Not a cruel world.

If you are reading this blog, then you probably sell a product or service. Most likely, you give your clients terms to pay your invoice. Maybe it is 10 days, 15 days, or even 30 days… But you give your clients time to pay their invoice. You just created accounts receivable (A/R). In the same respect, you purchase things from your vendors – material or services. Likewise, you most likely do not hand your vendor a check or cash that day, but they give you time to pay for the item you just purchased. So, you have accounts payable (A/P). This is probably more realistic. Guess what? You just created accruals.  In this example there are differences in the timing of the actual transaction and when the transaction process if totally complete and settled.  You have to track what is owed to you as an asset, and you have to track who you owe as a liability.

In reality, this is the world we live in and accrual basis accounting is recommended for virtually any business. We live and transact in an accrual environment.

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Accrual Basis Accounting

There are a reasons why major businesses and small successful businesses keep their accounting records on an accrual basis.  One reason is because that is how they generate financial statements that accurately reflect their operations and business, the other is because Generally Accepted Accounting Principals (GAAP) requires companies to be compliant using the accrual basis. A crucial part of the accrual basis is the matching principal – matching revenue and expenses.

You Are 60-90 Days Behind Your Company

The fact is that you are 60 or 90 days behind running your company if you are keeping your books and records on a cash basis. I have actually seen 30-year-old companies with revenues north of $100 million dollars and millions of dollars of expenses on a cash basis. And the recurring comment I get from these business owners is that they have trouble forecasting their business and they think they know what their margins are but really they are not sure. Especially in a business where there is manufacturing or assembly involved, or a service business that is beyond a half dozen people in size, you can bet your margins are wrong if they are on a cash basis.

By not having your accounting records on an accrual basis you are truly 60-90 days behind your business, you are not able to measure or forecast working capital and you will eventually run in to problems.  Some of these problems may be life threatening to your business if there is a downturn in the market or global economy.

It is More Than Margins and Operations

Knowing your margins on an accrual basis and understanding your profit and loss statement is critical. But you also need to know that your balance sheet is correct and truly represents what you have and owe. If you are on a cash basis, then you do not know what you have or owe. For example, prepaid insurance, payroll liabilities, purchase orders entered into your accounting system have not been invoiced by your vendors. As a result, these are all things that will not show up on your balance sheet if you are not keeping your books and records on an accrual basis.

At our firm, we’re are often engaged to help a client company transform their accounting records from cash basis to accrual basis. And the outcome is always positive as management is very happy to know that they can now get good accurate reports and their margins finally make sense. Now they can use their financial statements as one of many tools to run their business.

Cash Basis vs Accrual Basis AccountingA Valuation Perspective On Cash Basis vs Accrual Basis Accounting

You may have a very profitable company on a cash basis, but your financial statements are not going to be accurate. Your company will suffer when it comes down to valuation. Sophisticated financial buyers, strategic buyers and bankers understand that some private companies are still run on a cash basis, but guess what? They are going to discount the value of your company because it is on a cash basis. Eventually, the buyer will want the company they acquire on an accrual basis anyway. This is just another way that you can leave value on the table during a transaction to exit.

Switching from cash basis to accrual basis accounting is just one example of how to protect your company’s value. But there may be other destroyers of value lurking in your company. Don’t let the destroyers take money from you! Access our Top 10 Destroyers of Value whitepaper here.

Tax CPA vs Management CPA

What is ironic is that many Tax CPAs that prepare their clients tax returns or keep books and records do not care if you keep you books on an accrual basis. Actually, if you file cash basis for the IRS and your tax return, it will be easier for your tax preparer to keep your books on cash basis. But that is hurting you from a management perspective. Do not let your tax preparer tell you that you can just as well run your business on cash basis. He or she is simply wrong and too lazy. We can assume that they have never run a business. As a business owner, you need management books/records and management financial statements on an accrual basis and hopefully complaint with GAAP to run your business. They must be kept on an accrual basis so that they are more meaningful as a financial leadership tool.

Remember, CPAs are not all alike. Many of my friends still ask me if I am busy between January and April because I am a CPA. What the heck? I do not even prepare my own tax return, because I am not a Tax CPA.

CPAs are actually very different. The following are some of the different areas CPAs specialize in and many times do not cross other areas:

  • Taxes
  • Audits
  • Management and Operations
  • SEC Reporting
  • Forensic Accounting

Why Not Keep Your Accounting Records On An Accrual Basis?

There is no reason why you would not want to keep your accounting records on an accrual basis. (I am not referring to your tax books and records.) Your operational management financial statements should be kept on an accrual basis. Any decent accountant or controller can help you keep your books and records on an accrual basis. We can also assist you convert from cash basis to accrual basis as we have done this time and time again. We have our process in place to make this as efficient conversion.  In conclusion, there really is no good reason to keep your books and records on cash basis.

To discover other potential destroyers of value, click here to access our free Top 10 Destroyers of Value whitepaper.

Cash Basis vs Accrual Basis Accounting, Moving to Accrual Basis, Cash Basis vs Accrual Basis

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Cash Basis vs Accrual Basis Accounting, Moving to Accrual Basis, Cash Basis vs Accrual Basis

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You Can’t Afford Not to Spend Money on the Accounting Department

As a former CEO to some CEOs, this Blog is to my counterparts that “don’t know what you don’t know.”  I have seen time and time again closely held businesses that have experienced growth make the same mistakes over and over again. To the CEO that believes bookkeeping is a necessary fixed cost that should be minimized, here is a money making tip. You can’t afford not to spend money on the accounting department if you want to be successful.

The Big Mistake

Your company has grown over the years; you have experienced good times and maybe some bad times. Additionally, you have taken a nice paycheck and sometimes, some nice bonuses.  You got used to a certain life style. And you did all of this with a bookkeeper that does not cost you much.  But your company has grown. Still in the back of your mind, you know something tells you that you are not comfortable with your accounting records. But you elected to keep cost down for the bookkeeper and you do not spend much on accounting.

You Can't Afford Not to Spend Money on the Accounting Department

My Tax CPA Does It All

Maybe until now, some of you have your outside CPA that prepares your tax return also prepare year-end financials. This is not a knock-on tax preparers, but your CPA that prepares your tax return is an expert in one of many fields CPAs work in. For example, I am a CPA, but there is no way I would prepare my own tax return. Tax laws change way too often. I just want to maximize my deductions and pay my fair share of tax, but not more than that. That is why I have my tax CPA prepare the tax return.

But over the course of my career, I have found that most tax CPAs do not have operational expertise. They have not run a manufacturing or service business, nor have they had any P&L responsibility. The Tax CPA is considering accelerated depreciation, maximize expenses, etc. This is quite the opposite from a management set of financial statements. The role of the CPA Tax preparer is totally different from a “operational” CPA, Controller or even CFO.

Minimizing the Back Office For the Wrong Reasons

Most CEOs that I have worked with argue to minimize the cost of the back office. That includes the cost of preparing financial and accounting records. But think about this… The Securities and Exchange Commission (SEC) does not require public companies to prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) because they pulled this out of thin air as another way to regulate.  The SEC requires public companies to prepare their accounting records and financial statements based on GAAP because it is the best way to present fairly the results of your financial operations to third parties reading your financial statements.  In other words, It’s the RIGHT way to keep your books!

In some cases where there is significant debt and exposure, some banks also require that the company present your accounting records based on GAAP – regardless of whether it is a Public or Private company.  Some debt situations even require an audit. The banks simply make it one of the covenants related to your debt. When you present your books and records per GAAP, you have accurate financial statements, everyone is assured your accounting is correct.

Click here to download: The Smart Back Office for SMBs

The Importance of Using GAAP

So, if a lot of brain power has been put into coming up with GAAP, and the general consensus is that GAAP is the right way to present your financials and accounting records.  Why would you as CEO not require that your financial statements be presented per GAAP?

I have been an “operational” type CPA for over 27 years now. In addition, I have held the office of CEO twice. I have used my expertise in public company environments and private companies both as an employee and as a consultant in the U.S. and in other countries. I have seen many very successful small, medium and large private companies and they were all keeping their financial records per GAAP. Yet, I have NEVER seen a significant company (not a micro or small business) be successful and properly run without keeping their books and records per GAAP.

So why is it that CEO’s of closely held (private) business still permit their accounting records to be kept some other way?   The answer: they do not want to spend money on a fixed cost such as accounting. But they will spend money on the sales team, hunting leases, extravagant meals or parties.

Not getting the basics down – such as GAAP – leaves money on the table when you are exiting the company. Increase value with our Top 10 Destroyers of Value whitepaper.

You Can't Afford Not to Spend Money on the Accounting Department

You Can’t Afford Not to Spend Money on the Accounting Department

These are real life examples and outcomes of minimizing the cost of your accounting department that I have lived…

The service company incorrectly books gains on U.S. dollar receivables. In conclusion, they had to reverse $8 million from earnings.

I have seen this one several times. The company does not have some large assets on the balance sheet, because their tax preparer said they used accelerated depreciation. As a result, the balance sheet assets are severely understated. Hint: your value is understated. IT’S ABOUT THE MONEY DUDE!

The manufacturing facility does not properly accrue costs. As a result, their margins are way off, and the CEO wondered why they were always short on cash.

The company did not properly reconcile accounts including cash. This led to fraud.

The company did not properly recognize revenue. In conclusion, the company was understating revenue by millions of dollars.

I can go on and on with more real-life examples.

If you do not have your financial statements presented per GAAP, how are they prepared and presented? Do you really know your margins in your P&L. Do you really have all your assets, liabilities and equity presented correctly? Is your P&L, Balance Sheet and Cash Flow statement presented correctly? Guess what? Your ratios that your controller or CFO should be analyzing are not correct.

Leadership Needs to Believe in GAAP

Why do you think Exxon, Walmart and all other public company CEO’s believe in GAAP?  I have also seen many small, medium and large closely held private companies keep their accounting records per GAAP.  These are all successful companies. They know their margins, they know where cash is, they know their ratios and guess what, they know how to forecast!

I have also seen time and time again good companies that have been around a while and have experienced growth, and NOT prepare their financials per GAAP.  And every one of these CEO’s and companies has the exact same issues.

  • They really don’t know their margins in their P&L
  • Some companies don’t even really know their actual revenue
  • There is always that doubt in the CEO’s mind as to what is really going on in the business
  • The CEO lives a stressful life
  • Every time there is even the slightest decrease in margins, there is even a bigger disproportionate stress on cash
  • If your books are not per GAAP, then most likely they are not on the accrual basis; if that is the case, then you are 60-90 days behind your business
  • Having your books on an accrual basis is just the first step. There are many other accounting rules, procedures and pronouncements to get your books per GAAP. Just because they are on accrual basis, does not mean they are per GAAP. GAAP “rules” actually change frequently

You Can't Afford Not to Spend Money on the Accounting Department

In Summary

In my consulting business, I have seen CEOs that are “smart” as in they know what they don’t know. They bring us in to get the problem fixed. Although it takes time and money, the CEO is fully supportive and we get it done. These are the companies that grow and ultimately have a successful liquidation event. Or they leave a well-run machine to their family or employees.

But it shocks me to continue to see companies as large as $120 million in revenue, with a couple hundred employees that have not professionalized their accounting department. No one knows the true margins. Everyone stresses out about the “accounting records.” There are no correct historical financials, and most certainly, there are no forecasts. Unfortunately, there is no analysis of the business at all. In some high margin “hot” industries, this works for a while. The sins are buried. But millions of dollars are lost without knowing it. But, since ultimately everything ends up in cash, when that “hot” industry has even a slight downturn, the CEO feels the cash crunch.

Whether you are trying to increase the value of your company or positioning it for sale, this issue of unknowingly leaking cash is a destroyer. Learn how to tighten your belts and increase value with our Top 10 Destroyers of Value whitepaper.

Don’t be Cheap

Don’t be cheap. Spend the money (which is usually less than the hunting lease) to get your books and records based on GAAP basis.  Get your priorities straight.  Continue to have a professional accounting department in your business. YES, you will spend more than you are currently spending. But you can’t afford not to spend money on the accounting department!

Consider this… I had one investment banker with a very large firm tell me the difference in a valuation of an acquisition target from a company that has accounting records per GAAP and solid accounting department versus one that does not have a professional accounting department and accounting records not per GAAP is a difference of 20%-30%.  I had another investment banker tell me the difference in valuation is “one turn of EBITDA”. The use of EBITDA and multipliers is often used in valuation.

So if your company generates $2 million EBITDA and the multiple used is a 5, then your value would be $10 million with a professional accounting department and books per GAAP. In comparison, your value is $8 million with an unsophisticated accounting department and accounting records not per GAAP. I don’t think your professional accounting department will ever cost you $2 million per year! But not having it will.

Not having your financial records per GAAP is one of the destroyers of value. If you want to protect the value of your company, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

You Can't Afford Not to Spend Money on the Accounting DepartmentYou Can't Afford Not to Spend Money on the Accounting Department

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Do you need to be a CPA to be a CFO?

cpa to be a cfoNot too long ago, the Academy Awards took place, and they played reels of the Academy Awards that happened in the past 80 or so years. It reminded me of the time when I showed my grandson an old western movie… I thought some of the parts were hilarious, but my teenage grandson was horrified by the social commentary.

What do the Academy Awards and Old Westerns have to do with traditional CFO practices? There are norms that are acceptable now that were never allowed before. When the audience changed, the Academy adapted to the audience. So when the new generation steps into your office, you have to re-evaluate what it really takes for them to advance their career. Some might have capabilities of a CFO, even though they haven’t traditionally trained for it.

In the past, there was a certain path that you take to become a CFO. Some think the key is being a CPA to be a CFO. But now that times are changing, is it really necessary?

We like to talk about technology, millennials, current events, and politics, but they pretty much all say the same thing: if we constantly live in the past, we won’t have much of a future.

Timeline for a CFO

My friend’s nephew is graduating in accounting, and he’s wondering… “Do I need to get a CPA or MBA?” In other words, do you need financial expertise to be a financial leader?

Now don’t get me wrong… some people are really successful in this path. In fact, I definitely agree that CFOs, or any financial leader in general, should have a broad range of skills other than financial skills. Here is a pretty common path to CFO success:

cpa to be a cfo

Earn a CPA to be a CFO (and/or MBA).

Some might say you won’t have a successful financial career without a CPA license. The primary purpose of a CPA is for financial authorization, such as auditing and reviewing financial statements. Careers in finance such as accounting and auditing mostly require a CPA. Benefits of a CPA include larger salary potential, more career opportunities in larger companies, job security, and trust within larger companies. Larger and older companies with more revenues require more tenured and experienced employees.

MBAs are more broad. Studies show that those with MBAs have higher employment rates (around 60-70%) and higher base salaries. With MBAs, you can specialize in skills in addition to finance, such as supply chain, marketing, management, etc. So if you’re looking to gain new skills other than finance, MBA might be a better choice.

Gain Financial Experience Within the Company

Typically within the first few years, new hires will learn the basics such as budgets and accounting. As time and experience grows, new opportunities are formed, such as capital investments and larger accounts. Financial employees will gain expertise in skill sets before moving on to the next step.

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Take on Bigger Roles Outside of Your Comfort Zone

This is where getting an MBA and taking initiative comes in. CFOs are more than financial experts – they are leaders. By this point, basic accounting practices should be like reciting the alphabet… it’s that easy.

Financial leaders should always want to learn more skills. Taking on bigger roles outside of their comfort zones reflects that mindset and makes them stand out against their competitors.

Hold Controller Positions

This is pretty self-explanatory. The controller positions create more responsibility for the financial leader. After all, how can they handle a C-level position if they can’t handle a standard leadership position first?

This seems like a pretty solid path, doesn’t it?

Looking at companies now, however, aren’t as “solid”… and here’s why:

Modern-Day CFOs

When you think of a CFO after 2012, what do you imagine? Long gone are the days of bluetooth-talking, pinstriped suit-wearing CFOs, white-haired males. When I picture a modern-day CFO, I picture someone in a plaid long sleeve, young, and focused on multiple aspects of the company. That seems like an exaggeration, because it is! Overall, it is also a representation of how different the CFOs of today are, compared to Generation X and Baby Boomers.

The Past 5 Years

In our survey held in 2015, the average tenure for a CFO is 3-5 years. This contradicts the timeline above… Why would a CFO want to work 3-5 years after 15+ years of building his or her career?

As generations evolve, the tenure decreases. For example, the average tenure for millennials, according to our survey, is around 4 years.

cpa to be a cfocpa to be a cfo

2015 Survey Results: https://strategiccfo.com/blog/results-average-tenure-of-a-cfo-survey

Over the past 5 years, the CFO role has proven to be more complex and centered on leadership ability. CFOs now are more adaptable to change, hence the short tenure of a CFO.

The Next 5 Years

Ever heard of the “gig economy”? It’s the growing trend that contract workers and short-term “gigs” are commonly practiced. A great example of this influence is a friend of mine, who has 35-40 years of financial leadership experience. He recently quit his job, and is now looking for contract work. This puzzled me at first. He is a great person, and a very knowledgable asset to any company. As you can see, the gig economy is not only for the millennial generation. It’s a growing trend, for all leadership types.

Is this a reference for the trends to come? In the next 5 years, we can expect more contract work and less “climbing the ladder”… like getting your CPA to be a CFO.

Conclusion: Learning to Adapt

One of the ways we can grow as companies and financial leaders is to learn to adapt. If the world is shifting closer to a gig economy, explore that theory. If the average tenure for a CFO is less than 3 years, maybe we should change our hiring and training practices. Anything is adaptable if you’re constantly taking initiative and thinking one step ahead.

Don’t forget… the CFO is the CEO’s wingman. Learn how you can be the best wingman with our free guide!

cpa to be a cfo

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

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

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History of Accounting

See Also:
History of Factoring
Generally Accepted Accounting Principles (GAAP)
International Financial Reporting Standards (IFRS)
Financial Accounting Standards Board (FASB)
Certified Public Accountant (CPA)

History of Accounting

Below is the history of accounting timeline is a general overview of larger events which have all contributed to modern day accounting. It encompasses primitive accounting, with the use of an abacus, to the accounting software and regulation that we use today.

History of Accounting Timeline

The history of accounting timeline starts in 2500 B.C.

2500 B.C.

Historical accounting records have been found in ancient civilizations like the Egyptian, Roman, and Greek Empires as well as ancient Arabia. Back then, rulers kept accounting records for taxing and spending on public works.

1000 B.C.

The Phoenicians created an alphabet with accounting so that they were not cheated through trades with ancient Egyptians.

500 B.C.

Egyptians carried on with accounting records. They even invented the first bead and wire abacus.

423 B.C.

The auditing profession was born to double check storehouses as to what came in and out the door. The reports accountants took were given orally, hence the name “auditor.”

1200 – 1493

The first requirement for businesses to keep accounting records spread across many of the Italian Republics in the 13th century. They took these records mainly to keep track of the day to day transactions and credit accounts with other businesses.

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Luca Pacioli, the father of accounting, writes his famous paper “Everything about Arithmetic, Geometry, and Proportion.” The treatise that he writes is mainly a study that Pacioli performs on the common practices of merchants in Venice, Florence, and Milan. He revealed that several merchants kept books of debits which means “he owes” as well as credits which means “he trusts.” With this early double entry accounting system merchants were able to maintain records so that they could improve the efficiency of their businesses. With these records came the primitive income and balance sheet statements.

1500 – 1700

As the time progressed, double entry records had large and small innovations added. For example, the East India Company develops invested capital and dividend distribution during the 17th century. This also created the need for a change in financial accounting and managerial accounting. They used the first presentation to gain investors, while they used the next presentation for business efficiencies.

1700 – 1900

During the Industrial Revolution, accounting really took off as industrial companies sought out to gain financing and maintain efficiency through operations. Several of the double entry accounting methods was truly developed in this area as there was a focus on business as never before. Shortly after, the first accounting organization was developed in New York in the year 1887. The title and professional license of the Certified Public Accountant followed shortly in the year 1896.

1920 – 1940

The 20s accounting really became important to reduce the amount of fraud and scandals that were performed in businesses around the country. U.S. GAAP was developed shortly after by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) in the year 1939.

1940 – Present

Since this time the AICPA and FASB have been working together with the Securities Exchange Commission (SEC) to develop accounting standards for business. Through the help of technology and computer systems all standards created for U.S. GAAP have been centrally located into what is known as the “codification.” The codification reveals all of the current practices and standards, and even reveals developing areas of standards of accounting that are currently being debated upon.

Several accounting systems like Peachtree and Quickbooks have also made the accounting profession automated. These programs ease the reporting of transactions, but also comply with GAAP. Because of this there is a lesser need for accountants to post transactions, and more of a need for the review of these transactions. In some firms, they don’t realize the change as they still employ a full accounting staff. As time moves forward it is necessary for accountants to move into a role of reviewing transactions rather than posting them.

Download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.

history of accounting

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Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before you prepare your financial statements.

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

Click here to learn more about SCFO Labs

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How to Select a PEO

See also:
Defining a Professional Employer Organization
Advantages of PEO Services for the Business Owner
PEO Compared to Outsourcing Payroll
Professional Employer Organization (PEO) FAQ’s
Service Department Costs

How to Select a PEO

Creating a successful partnership with a Professional Employer Organization (PEO), for the co-employment of your employees, requires that the Business Owner apply the same standards used when selecting a CPA, an Agent of Record, an Attorney or any other trusted partner/advisor/consultant. Now, let’s look how to select a PEO.

First, assess your business to determine your Payroll, Employee Benefits, Human Resources and Safety and Risk Management needs. Then, decide whether to build internal capacity or execute a Customer Service Agreement (CSA) with a Texas Licensed PEO for that capacity. After, confirm that the PEO Vendor is Licensed to conduct business in the State of Texas. Contact the Texas Department of Licensing and Regulation to confirm licensing. Reach them either by calling 800.803.9202 or visiting (www.license.state.tx.us). When you visit the website, (right side of page) CLICK on “Search Licensees by License Type”. Then CLICK “Inquire by License Type”. Then SELECT “Staff Leasing Services.” After that, SELECT “Inquire by Name”. Finally, type in the Company Name, and then CLICK “Search”.

Download The 5 Guiding Principles For Recruiting a Star-Quality Team

Select a Certified PEO Vendor

Confirm that the PEO Vendor is certified through the Employer Service Assurance Corporation (ESAC). In addition, they provide independent professional verification that a PEO has met the highest ethical, financial and operational industry standards through comprehensive certification and ongoing monitoring. For more information, visit www.esacorp.org then CLICK on “Verify” then type in “PEO Name” then type in “City” then SELECT “State” then CLICK “Submit”.

Verify that the PEO Vendor is certified through the Certification Institute. It provides an independent professional verification that a PEO’s risk management program is meeting proven insurance industry risk management best practices to control WC insurance losses. Certification provides WC insurance companies with ongoing assurance that a PEO is in fact implementing industry best practices in a consistent and effective manner. Visit (www.certificationinstitute.org) then “CLICK Go Workers’ Compensation Risk Management Certification” then CLICK (Top Tab) Certified Companies” then type in “PEO Name” then type in “City” then SELECT “State” then CLICK “Search”.

Verify Your PEO Vendor

First, verify the length of time that the PEO Vendor has been in business.

Then, verify that the PEO Vendor possess the Financial Strength to deliver the contracted services and meet the financial requirements. (Ask for a Copy the PEO’s Dun and Bradstreet Financial Rating). (Note: An ESAC Certified PEO is Audited Annually and is Financially Assured with a $1,000,000 Surety Bond plus an Excess Surety Bond of $5,000,000 for Key Services.)

When you have verified the above, verify that the PEO Vendor possess the Workers’ Compensation and General Liability Insurances (Copies of Certificate of Insurances) necessary fulfill the contractual obligations associated with a PEO Arrangement.

Verify how the PEO Vendor’s Employee Benefits Plan is tailored. Is the Employee Benefits Plan an all or nothing proposition? Or after a cost/benefit comparison has been completed? If the current plan is more cost effective to remain in force, then will the PEO accommodate such an arrangement? Will the Employee Benefits Plan fit the needs of Your employees?

Verify how the PEO Vendor funds Employee Benefits. Is the PEO fully-insured, self-funded, or partially self-funded? (Note: In the State of Texas it is unlawful for a PEO to self-fund or partially self-fund a Medical Health Plan) Who is the third-party administrator (TPA) or carrier? Finally, is their TPA or carrier authorized to do business in the State of Texas?

Then, verify how the PEO Vendor will Collect Premiums for Employee Benefits. Do they collect the premiums weekly (as-you-go) or monthly (in advance)?

Review PEO Customer Service Agreement

Review the PEO Customer Service Agreement (CSA) carefully. Construct the CSA to comply with the requirements of the Texas Staff Leasing Services Act. It is a “Service Agreement” titled “… / Client Leasing Agreement (Texas Employees). Are the respective parties’ responsibilities and liabilities clearly stated? What guarantees are provided? Also, what is the Contract Period and Extension(s)? What provision(s) permit cancellation or termination of the CSA?

Request a Personal Presentation by the PEO Vendor. Sales brochures and fancy proposals are easy to print; however, One-on-One contact reinforces credibility.

Key Words for the Business Owner’s Consideration

Look at the following key words for the business owner’s consideration:

“Responsible for…” – means that the PEO Vendor is the lead and assumes all cost and liability associated with the action.

“Assist with…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to help and support the Business Owner in that action.

“Advise on…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to recommend and suggest to the Business Owner regarding that action.

“Consulting…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to provide expert advice or information to the Business Owner regarding that action.

Costing Methods

Identifying the Business Owner’s Hard Dollar Cost

For purposes of this Guide, the Business Owner’s Hard Dollar Costs are defined as fully allocated costs for an activity(s) that include the following:

  • All direct and indirect personnel
  • Payroll (Federal Insurance Contributions Act Social Security and Medicare (FICA)
  • Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA))
  • Insurance (Workers’ Compensation (WC) Premium and Annual Audit)
  • Materials and supplies
  • Equipment
  • Software
  • Capital depreciation
  • Rent
  • Maintenance and repairs
  • Utilities
  • Travel
  • General / administrative overhead

Pricing Formula for PEO Services

The Cost Elements typical to PEO Service Pricing includes the following formula:

FICA + FUTA + SUTA + WC Premium (Pay-As-You-Go) + Administrative Fee = Billing Rate.

Variables That Affect PEO Pricing

The Variables that affect PEO Pricing are: (1) the Annual Amount of Payroll as a Ratio to the Number of Employees, (2) the NCCI Experience Modifier Rate, (3) the Risk associated with the Business Type, and (4) the SUTA Rate based on the Annual Employee Turnover and Unemployment Claims Paid.

Therefore, PEO pricing is usually related to gross payroll, and is a “Billing Rate” stated as a cost per $100 of gross payroll. Most PEO’s combine all employee related costs (Bundled Price) into a factor for each workers’ compensation class code, to allow for a single payment, which is simple and predicable for the Business Owner.

Once the “Billing Rate” has been established, the cost per $100 of payroll remains fixed, excluding any statutory increase in the minimum wage, employees taxes, sales tax or workers’ compensation rates. Keep in mind, a PEO Vendor may or may not charge a one-time “Set-Up Fee”.

In addition, a PEO Vendor may or may not require a one-time (one pay period) payroll, payroll taxes, workers’ compensation, and employee benefits premium Deposit, prior to the processing of the First Payroll.

Note: A PEO Vendor may or may not charge for Pre-Employment Services such as: Background Checks, Drug Screens, and Credit Checks.

Employee Benefits – Health – Welfare – Retirement

The information in this chapter has been written to provide the basic information about Group Health Insurance Plans, Welfare Plans (Ancillary Products), 401(k) Retirement Plans, and how they are typically implemented in a Co-Employer Arrangement.

Additionally, to minimize any risk to the Business Owner, offering benefits to Your Employees must be done correctly and in compliance with IRS/DOL/ERISA regulatory guidelines.

PEO Vendors bring to the table a selection of plans that will have different requirements for participation, different underwriting and enrollment procedures, and different premium payment timelines.


With no consideration of a cost/benefit comparison of the current Benefit Plan(s) in-force and available to Your Employees; PEO Vendors whom require that their Group Health Insurance Plan, and/or their Welfare Plans (Ancillary Products), and/or their 401(k) Retirement Plans be adopted as the only option(s) available to the Your Employees; are generally more interested in establishing an “Exit Barrier” to the PEO Arrangement.

Group Health Insurance Plan – Requirements for Participation

Health Carriers will set a specific minimum percentage of the monthly premium, for Employee Only, to be paid by the “Work Site” Employer (Business Owner), with the balance of the monthly premium as the responsibility of the employee.

Additionally, a minimum percentage of eligible employees must participate in the plan. Typically, these percentages will be 50% of the monthly premium, for Employee Only, to be paid by the “Work Site” Employer (Business Owner) with 75% of the eligible employees participating.

Note: The 75% participation requirement does not include employees who already participating in a group or personal health plan. For example, they are covered on their spouse’s medical plan. Also non-eligible are employees or employee dependents that are on a Social Security disability.

Group Health Insurance Plan – Underwriting and Enrollment Procedures

Medical Election Form

First, the PEO Vendor should provide the Business Owner with a Medical Election Form. The form acts as documentation of the desire to enroll the Your Employees in a Group Health Insurance Plan. It also provides acknowledgement, by the Business Owner, of the participation and eligibility requirements of the Group Health Insurance Plan being offered.

Medical Consensus Form

Then, all the employees who will be participating in the plan must complete a Medical Census Form. Then, they review these forms to provide a quote of monthly premiums for a Group Health Insurance Plan. The PEO quotes these premiums based on rates associated with the type of coverage (80/60, 90/70, etc.), the optional yearly deductible, the geographic region, and the type of prescription drug coverage selected.

Group Health Insurance Plan Application

Then, the employees then fill out the Group Health Insurance Plan Application, which includes the employee, spouse and dependents information. Those employees not participating will fill out the portion of the application where they decline coverage.

Cafeteria 125 Plan

Finally, upon completion of the application, employees may be given, depending upon the PEO Vendor, an opportunity to enroll in a Cafeteria 125 Plan. They can select or decline this option but they must sign documentation verifying their decision.

As the “Work Site” Employer (Business Owner) offering benefits to Your Employees, there is an absolute obligation to meet Internal Revenue Service (IRS), U.S. Department of Labor (DOL) and Employee Retirement Income Security Act (ERISA) compliance requirements in presenting and offering these benefits.

Group Health Insurance Plan – Premium Payment Timelines

Typical to the PEO marketplace are two (2) ways of payment for insurance product premiums: Payment (1) is referred to as “Pay As You Go” which is payment by pay period for effective coverage only for the next pay period, and Payment (2) is referred to as “Monthly Pay In Advance” which is payment for effective coverage for the month following the last pay period.

Because Payment (1) “Pay As You Go” does not provide for coverage beyond one pay period, this method for collecting premium payment is often used, by a PEO Vendor, as an “Exit Barrier” Strategy. Meaning, with a Payment (1) premium schedule, terminating the CSA may have an immediate impact on the continuation of Your Employees’ insurance coverage.

However, Payment (2) “Monthly Pay In Advance” does provide for coverage until the end of the month for which premiums have been paid.

Welfare Plan (Ancillary Products) – Requirements for Participation

Welfare Plans (Ancillary Products) generally including: Dental Plan, Vision Plan, Short-Term Disability Insurance, Long-Term Disability Insurance, Life Insurance, Accident Insurance, Cancer Insurance, Critical Illness Insurance, Hospital Confinement Insurance, Term Life Insurance.

Offerings for a Welfare Plan are individual purchases with no “Work Site” Employer (Business Owner) premium payment requirements.

Underwriting and Enrollment Procedures

The Insurance Representatives generally conduct Underwriting and Enrollment for Ancillary Products on-site (and not the PEO Vendor).

Insurance Representatives use Applications/Enrollment documents to create a data file on each policyholder. They use this data to print individual insurance cards, provider listings and to provide a mailing address for sending the employee a copy of the policy.

Welfare Plan (Ancillary Products) – Premium Payment Timelines

Normally, premium payments are “Monthly Pay In Advance” which is payment for effective coverage for the month following the last pay period.

401(k) Plan Overview

Through the PEO Vendor, the Business Owner, as the co-employer, may choose to offer a 401(k) Plan to Your Employees. This type of retirement vehicle is a single multiple plan designed by legal experts to conform to IRS regulations that address plans in a PEO/Client relationship/contract. Essentially, the plan is set as a single plan with the PEO Vendor as the fiduciary and with provisions for multiple participating co-employers. Furthermore as the co-employer, the Business Owner adopts the plan through an adoption agreement to make it available for their employees to participate. The PEO Vendor’s Third Party Administrator (TPA)’s responsibility includes the following:

  • All non-discrimination testing
  • Government filings
  • Other administrative actions


During the adoption process, the Business Owner has the option to choose to provide or not provide some level of employer “matching” contribution. Likewise, the Business Owner determines what the eligibility criteria will be.

Payment Requirements

The following includes information about payment requirements.

Payment of Employment Taxes and Wages

In addition to FICA, FUTA, SUTA, and WC Premium. by contract, the PEO Vendor assumes the responsibilities for payment of wages, salary, or other compensation made on a recurring basis to Your Employees.

The provisions or the Texas Staff Leasing Services Act guides the entire process.

Payment for PEO Services

Prior to the “Pay Date” the PEO Vendor will Invoice the Business Owner at the contracted “Billing Rate” per $100 of Processed Payroll plus Insurance Premiums, plus 401(k) Contributions, plus Miscellaneous Deductions, and any additional charges for such services as Pre-Employment Background Checks, etc.

Prior to Payroll Processing, the Business Owner reconciles and approves the Invoice Amount.

Then before the actual payroll processing begins, the Business Owner will simultaneously transmit approval and payment of the Invoice Amount to the PEO Vendor.

Upon receipt of payment, the PEO Vendor processes payroll and directs payment to the individual “co-employees”.

What PEO Vendors Need to Know

To assist a PEO Vendor to properly prepare a Request for Service Proposal, the following information is necessary:

1. Identify if a PEO Arrangement is currently in effect.

2. Please provide the Company Name of the current PEO.

3. Please provide the current “employer of record’s” Federal ID #.

4. Please provide the current “employer of record’s” SUTA Rate.

5. Please provide a copy of the most recent Payroll Report.

6. Please provide the number of Full-Time and Part-Time employees.

7. Identify the current Payroll Frequency.

8. Please provide the current Workers’ Compensation Wage information: WC Class Code, Number of Employees in that Code and the Annual Wages Paid in that Code.

9. Please provide a copy of the Workers’ Compensation Policy Declaration Page.

10. Please provide a copy of the current “employer of record’s” Workers’ Compensation Loss Runs for the Previous Three (3) Years.

11. Please provide a copy of the OSHA Logs for the previous 3 years.

12. Please provide a copy of the General Liability Declaration Page.

13. Please provide a copy of the Schedule of Benefits for the current Health Care Plan.

14. Identify the name of the current “employer of record’s” current Health Plan Provider.

15. Provide the employee census (DO NOT include NAMES or ANY PERSONAL IDENTIFIERS) for the current “employer of record’s” current Health Care Plan.

What Questions to Ask the PEO Vendor

If you want to assure a low risk factor for the Business Owner and to evaluate a Request for Service Proposal, then request each PEO Vendor to provide the following information:

  • State and address any and all “Set-Up Fees”.
  • State and address any and all services included in the “Billing Rate”.
  • The Staff Transition Process.
  • Their Communication Method(s) used when interacting with Your and Your “co-employees”.
  • The Customer Service Model.
  • Description of theirPayroll Services. (Input Methods, Payment Methods and Reporting) and (Responsible for…, Assist with…).
  • Description of their Employee Benefits Plans. (Health, Welfare and Retirement).
  • How they fund Employee Benefits.
  • How they pay Employee Benefits. (“Pay As You Go” or “Monthly Pay In Advance”).
  • Describe their Human Resources Services. (Responsible for…, Assist with…, Advise on…, and Consulting…).
  • Describe their Safety and Risk Services. (Responsible for…, Assist with…, Advise on…, and Consulting…).
  • Provide copies of their Certificate of Insurance for both Workers’ Compensation and General Liability.
  • Describe their Background and History. (Length of Time in the PEO Business).
  • Describe their Qualifications. (License, NAPEO, ESAC, Certification Institute, Principles and Key Staff).
  • At the Personal Presentation, Request that the PEO Vendor provide a Sample copy of their “… / Client Leasing Agreement (Texas Employees)

Beyond PEO

If you want to determine which candidates are the right fit for your company, then download and access your free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team.

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How to Hire a CFO Controller

How to Hire a CFO Controller

When you need to hire a CFO Controller, there are a few steps that you need to take prior to the actually hiring. Start the ad placement process by first asking yourself a few questions about your company. How does the company describe itself, its culture and industry space? What intangibles are you looking for? What sort of hard skills and experiences the position will require? You must be prepared to set expectations regarding the typical tenure and career track of that position as the company grows. Come up with a list of points to cover. Other issues to consider include the salary for the position, start date, travel expense for interviews, and relocation package. Ad Placement Options: Houston Chronicle, Monster.com

Accentuate the positives when writing the placement ad.

It is also important to manage your expectations in terms of the candidate pool. For instance, in a good economy it may not be so easy to get good candidates. Certain compromises on geographical search area, salary, and moving expenses may need to be considered. You may also need to clarify your stance on candidates with short work tenures (i.e. job hopping).

Filtering Resumes

Things to look for include: industry experience, education or Certification- CPA, MBA and specific experience sets (Ex: Systems Implementation, Financial Transformation)

Initial Screening/Phone Interview

After you have screened for your top candidates, you are now ready to begin contacting them and set up an initial phone interview. For out of town candidates, you may want to advise them of the company’s stance on interview travel expenses and/or relocation package.

Ask the following questions to candidates:

1. What are you looking for in a position?

2. Tell candidate about the position and the company

3. Would this be acceptable to you? Is this something that interests you?

4. What are your salary requirements?

5. When can you start?

6. Can you provide any references?

Summarize and review each candidate

Make sure to cover areas such as education, industry and work experience, salary expectations, etc. And then, identify the top 2 candidates from your round of phone interviews. Out of the total pool, prepare a list of 4-5 candidates for an office interview.

Office Interview

Start off by deciding who should be involved in the interview. Confirm open time windows in their schedules. Decide on the type of format that you would prefer: group or one-to-one? Start thinking about what you would like to see out of the interview.

On the candidate side, obtain the interviewee’s permission to contact their references. If they have not yet provided any, this would be a good time to ask for them.

Hiring Process

Once you determined whom you are hiring, you are now ready to begin the hiring process. Decide who should do the reference and background checks. When all reference and background checks have been completed, contact the candidate to inform them of their hiring status. Then go over the salary and benefits. Follow-up your conversation with an offer letter. Make sure that compensation is on a period basis versus an annual basis. Giving an annual pay may infer a contract which may open the company up for possible litigation in case of termination.

Background Check

There are a variety of companies that are able to conduct background checks on employment, criminal history, education, references and professional license status:

Here are some for your reference:

1. Kress Employment Screening

2. Choicepoint

3. ADP Screening and Selection Services

4. Personnel Profiles

5. Inquest

In order to determine which candidates are the right fit for your company, download and access your free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team.

hire a cfo controller

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

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hire a cfo controller

See related article: How to Hire New Employees

See Also:
How to Choose An Independent CPA or Auditor
How to Control Audit Fees
American Institute of Certified Public Accountants – AICPA
How to Control Annual Audit Fees
How to create dynamic cash flow projections

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Choose a CPA or Auditor

Choose a CPA or Auditor

Do you choose a CPA or auditor? Any company whose stock is sold to the public is subject to the reporting requirements of the Securities & Exchange Commission, which include having its financial statements audited by an independent certified public accountant. Whereas companies, whose stock is not sold to the public, are not subject to such reporting requirements. But many such companies have an annual audit of their financial statements performed because one of the following may require it:

Owners may require one to satisfy themselves that the data provided by the company’s financial staff is “materially correct.”

It should be understood that an audit does not guarantee that the financial statements are 100 percent “correct” but rather that they are “materially correct and not misleading.” Also, the audit is not intended to detect fraud.

Selecting an Auditor or CPA

Selecting an auditor (CPA) is an important task for a company, as the CPA can be a valuable resource for information, and such relationships generally last for years. But privately-owned companies rarely use the 4 largest international (Big 4) certified public accounting firms; particularly if the company revenues are under $100 million. This is because the fees commanded by these firms who perform most of the audits of the world’s publicly owned companies would be too expensive.

Factors to Consider When You Choose a CPA or Auditor

Consider the following factors when choosing from the remaining firms:

  • The nature of the company’s operations – multi-national, multi-state, or multi-location within a state
  • Company plans for expansion, potential future debt placements, and IPOs
  • Experience of the CPA in company’s industry, particularly that of the local office staff’s experience
  • Size of CPA and its impact on ability of CPA to meet company reporting requirements, such as timetables and contractual deadlines
  • Compatibility of CPA staff with company culture
  • CPA’s reputation within the local business community, particularly the company’s bankers, trade creditors, or other debt holders
  • References from existing and former clients
  • Potential for year-to-year stability of staff assigned to your account
  • Tax experience in company’s industry
  • Composition of CPA’s staff assigned to account
  • Distribution of CPA’s businessaudits, write-up, tax
  • Willingness of CPA to utilize company staff to minimize annual audit and tax return preparation fees
  • Audit fee charged

Keep in mind that Bigger does not necessarily mean BETTER SERVICE for your company.

Determine which CPA or auditor are the right fit for your company using our 5 Guiding Principles For Recruiting a Star-Quality Team.

choose a cpa or auditor

Strategic CFO Lab Member Extra

Access your Recruiting Manual Execution Plan in SCFO Lab. The step-by-step plan recruit the best talent as well as avoid hiring duds.

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

Click here to learn more about SCFO Labs

choose a cpa or auditor

See Also:

How to Control Audit Fees
How to Hire a CFO Controller
American Institute of Certified Public Accountants – AICPA
How to Control Annual Audit Fees
Certified Public Accountant (CPA)

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