For Accurate Performance Insights, Bookkeeping Needs More Strategic Attention
We’ve discussed in earlier posts the importance of considering all sales & marketing activities to analyze sales efficiency trends (namely CAC and Payback Period metrics), which in turn are critical in predicting future financial outcomes. But knowing what to measure and being able to actually measure it are not the same thing.
Clients are regularly surprised at the frequency and impact that basic bookkeeping activities can have on their performance measurement capabilities, but we see it all the time. One key culprit: bookkeeping expense entries go unchecked for departmental category correctness or strategic visibility. The result: it’s highly likely that many relevant sales & marketing costs are buried elsewhere in your P&L, making your sales efficiency analyses ripe for mistakes.
Who’s to Blame?
It’s not that companies have bad bookkeepers – or poor financial oversight of them. It’s simply that the startup finance organization has not been set up to scale with the company’s strategic planning & analysis needs. The reasons for these limitations are as follows:
- Scope: the bookkeepers’ focus is on making sure that expenses are entered in a timely fashion; that financial statements balance out and are accurate from a tax perspective; and that vendors are paid on time. It’s not in their typical scope to understand which specific expense account is most useful for tracking and predicting topline momentum.
- Time: while the growth-stage company CFO may have the expertise to hunt down and analyze the necessary expense information themselves, they are already carrying out near-impossible feats of multitasking: overseeing the monthly financial close, payments, and collections;; producing board materials; ensuring GAAP & sales tax compliance; managing payroll, health insurance, and staff accountants; approving individual expense requests; the list goes on. In short, they simply do not have the time.
- Data Quality: management may look to new performance analytics tools to enhance their FP&A capabilities, but even the most advanced software is limited by the quality and accuracy of the underlying data going into it; without auditing functional team processes or the baseline structure of existing ERP systems, this is just putting lipstick on the pig, as they say 😉
Today we’ll explore a few of the most common bookkeeping practices that may be hurting your growth analytics capabilities, so you can increase reporting efficiency and forecasting accuracy for the long-run.
‘Natural Accounts’ Are Not Strategically Informative
Standard financial reporting dictates that expenses get bucketed to what it IS (the ‘nature’ of the expense), rather than what it DOES (the ‘use’ expense). From a sales & marketing analysis perspective, this can mean that:
- Sales & Marketing contractors and agency fees gets totaled in generic G&A: Professional Services, together with unrelated costs like legal & accounting
- Sales & Marketing software goes into G&A: Dues & Subscriptions that also includes your MS Office suite, Zoom, Slack, etc etc etc
- Sales & Marketing team compensation is grouped into company-wide Total Payroll (same goes for health insurance, 401k, etc) that can be hard to separate out from other departments
The result: you are limited to a single version of your CAC analysis that includes only a subset of expenses, like digital ad spend and sales team commissions.
Vendor Auto-Tags Part I: Not-so-smart AI
Busy bookkeepers often rely on their accounting software’s “AI” to automatically categorize expenses based on the vendor’s name, and are not likely to investigate if this is functionally correct unless the single charge is substantial.
But this doesn’t always produce the best results. For example, we’ve seen Quickbooks auto-tag “Canva” – an affordable graphic design SaaS tool that’s popular with marketing teams – to G&A: Office Supplies. Quickbooks seems to think this purchase is for a canvaS (as in, the physical art supply). While a single month’s charge for a Canva subscription might not move the needle in terms of total sales & marketing budget, spend reports can be meaningfully skewed when these types of miscategorizations are happening across many vendors, month after month.
Vendor Auto-Tags Part II: One Name, Multiple Expenses
Additionally, a single vendor might represent two different types of expenses – but the bookkeepers, who are siloed from strategic revenue operations and management budgets, have trouble spotting when this is the case.
For example, one of the first subscriptions a startup ever purchases might be their Google Admin account (ie their email and file sharing service). Right away, the bookkeeper creates a vendor tagging rule that Google = “G&A – Dues and Subscriptions”. This works great until the company starts investing in digital marketing, at which point their Google Adwords purchases (which often just show up as “Google” in the transaction data) also get pushed into G&A automatically.
As a result, best case, whoever is doing the CAC reporting has to go back into the accounting system, month after month, and manually pull out the individual Adwords transactions from the other G&A Dues & Subscription $s – and then try to keep track of this data offline to be referenced in future months. Worst case, (and we’ve seen companies where this has happened for years on end), Adwords remains excluded from the analysis altogether and CAC gets grossly underrepresented, becoming far less useful – and even misleading – for budgeting and strategic decision-making.
This can be exacerbated when sales and marketing expenses are paid by credit card. Depending on your accounting software, credit card transactions may not include enough underlying vendor information, so bookkeeping just buckets these $s as an ambiguous “AMEX Spend” or just “Other” cost.
Partner Fees that Go Unseen
Selling through a referral partner or marketplace can be a fantastic growth strategy: it gives you access to a huge new group of customers all at once, while limiting the capital you put at risk by not “paying” for that revenue until after the sale is made.
However, referral agreements are often set up such that your partner who makes the sale first collects the revenue from the client; then takes out their cut; and then distributes the net earnings to you. But because your bookkeeping team only sees this net $ amount that comes into the bank, the gross revenue & related referral expenses don’t get captured in your P&L at all. While this may not be an issue from a tax reporting perspective (the bottom-line net income is the same), it doesn’t give you the full picture of your direct vs. partner sales performance.
The Upshot
Using your P&L as-is won’t give you an accurate picture of CAC or other sales efficiency trends. Alternatively, tasking your current finance team with the manual hunt for this data every month on top of their existing responsibilities isn’t feasible (at least if you want timely, complete insights – and without risking employee burnout).
To improve alignment between your monthly income statement and desired sales efficiency insights, an FP&A Advisor can:
- Review monthly financial reports and regularly audit vendor categorization rules to ensure strategic data capture accuracy
- Redesign your P&L reporting structure to align with performance analysis needs
- Educate your bookkeeping staff on the strategic insights that their work drives, and provide best practices training to support their efforts
