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The Subject Of Overhead

The Subject Of Overhead

Today we are going to talk about a subject about as exciting as a yearly checkup – overhead

In our varied careers in accounting, finance, and tax, Donna and I have a love/hate relationship with the “O” word. On the one hand, accounting and finance is overhead, and that’s how we feed ourselves (apart from growing a good portion of our own food). On the other hand, we are often the first to need to defend our jobs when business isn’t too hot.

It feels a little like being on the chopping block of The Bachelorette competing against a real life Ken doll. You have thirty seconds to explain why you should stay, even though you are not nearly as sexy.

So here it is – your accounting overhead is exactly like a regular checkup. A necessary evil for the longevity of your company. You will pay one way or the other, with preventative maintenance, or with a terrible hospital bill down the line. Think of how much fun an IRS audit would be if you didn’t have your books together. Imagine the missed opportunity your company couldn’t capitalize on because you couldn’t get a line of credit.

The good news is it’s easier than ever to cut your administrative overhead, and it has never been cheaper. The reason for this is cloud technologies and open API’s. This is really just a technical way of saying “open communication” between data sources.

To explain this in the clearest way, we need a bit of a history lesson. Let’s first talk about “Old School Accounting”.

Any accounting system is dependent on a variety of data sources in order to build coherent books with a solid audit trail. These data sources can be both digital and analog – examples include bank statements, invoices, purchase orders, vendor bills, etc.

Not too long ago, many of these data sources were in analog form, where stacks of paper would go on an accounting clerk’s inbox for processing, processed into the general ledger, and placed in the outbox for filing. This processing would cost roughly $12.00 – $15.00 per hour per accounting staff.

Let’s say you have 2 clerks – one for accounts payable and one for accounts receivable working 25 hours per week at $12.00 per hour each for a final monthly cost of $2,400. This does not include your payroll solution.

This process evolved into more and more of a digital format, where bills were paid online, and invoices could be sent out online as well. In this “digital” category, I have to make a distinction between what I will call “closed digital” and “open digital”.

Closed digital means that the data source is in digital format, but not easily readable by accounting software for automatic processing – think of a PDF version of a bank statement. Closed digital still requires human intervention to move the data over to the accounting system – still $12.00 per hour.

Open digital means that source documents are both digital, and in an easily readable form to the accounting software. Probably the most widely known example of this would be the Bank Feed. This is a link between online banking data and the accounting software that constantly pushes your banking activity to the accounting software for semi-automatic processing. I say semi-automatic because while most recurring charges can be automatically updated to your books, one-off charges and paper checks still require some human intervention to code correctly.

While automation is very cool and a central component of cloud accounting, there are other forms of leveraging open digital data as well. Job tracking apps can be employed by field service companies to track the status of a job from a crew leader’s smartphone. These can handle time sheets for employees or independent contractors, billable expenses that need to be invoiced, and mileage tracked on company vehicles.

All this data is collected in real time from operational staff, and sent directly to the accounting system as it occurs. An invoice can be sent and paid as soon as the job is done – the money flows to your bank account, and updates your income and checking balance on the general ledger, without extra admin staff.

Now your overhead dollars are spent on maintaining a robust digital accounting system, fixing the occasional error, and approving invoices before they go out (a good internal control) instead of taking on two extra part time employees for data entry that don’t contribute to the bottom line. The solution I just described costs $500 -$600 per month compared to $2,400.

While no business owner likes overhead, it doesn’t have to be insanely expensive. Cloud technology has brought the power of automation and streamlining to anyone with access to a web browser. If you are still paying hourly for data entry, it’s time to find a better way.

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