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Passing your Pre-Award Accounting Survey – Direct Costs by Contract

To assist with preparing for a Pre-Award Survey of Prospective Contractor Accounting System, in this series of articles we are reviewing the Evaluation Checklist criteria on the Standard Form 1408. The Standard Form 1408 serves as a guide for making sure you are prepared for the audit, and as such we will be reviewing each checklist criteria within the SF1408 to help assist in creating and maintaining an adequate accounting system. Our first article discussed proper segregation of direct and indirect costs. In this article, we will discuss the identification and accumulation of direct costs by contract.

As a reminder, these articles are meant to serve as a starting point, not a master guide. DCAA, or other parties performing the audit, will perform varying procedures to determine system adequacy. Achieving a DCAA approved accounting system is feasible for any organization, but may require changes to your policies and procedures and does require a comprehensive analysis of your overall accounting system, and that includes more than just the software itself.  In this article, we are going to discuss the following checklist criteria:

2b. Identification and accumulation of direct costs by contract

FAR 31.202 defines a direct cost as “any cost that can be identified specifically with a particular final cost objective”. The most common example of this would be direct labor, direct travel, and direct materials.  If you reference back to Part 1 of the series, there is detailed information about segregating direct costs from indirect costs, and what constitutes a direct cost. The checklist criteria 2b above deals with a step after we have identified a cost as a direct cost as opposed to an indirect cost.

Once we have identified a cost as a direct cost, we then must assign these costs to a contract to achieve the criteria above. Let us take direct labor as an example. If we have a Help Desk Technician that works on Contract A, we need to “identify” and “accumulate” that employee’s salary/pay by contract in the accounting system. We must first “identify” the cost by contract. To do so, we need the Help Desk Technician to specify on their timesheet that they worked on Contract A. Next, to “accumulate” the cost by contract, when we are recording direct labor for the Help Desk Technician in the accounting system, we need to tell the accounting system that they worked on Contract A based on their timesheet. If the Help Desk Technician in a different pay period splits their time between multiple contracts, we need to split their labor cost between the multiple contracts in order to accumulate the direct costs by contract. This would be done based on the hours worked on each contract specified by the employee on their timesheet.

Putting the criteria into practice

To illustrate how to satisfy the checklist criteria, we will use QuickBooks as an example, since it is one of the more widely used accounting systems by small businesses in the government contracting industry. The terminology and processes will vary depending on your accounting system, but the concepts remain be the same. In QuickBooks, you have “Customers” and “Jobs”. Each Job must be associated with a Customer. In most cases, the agency or prime contractor you are contracting with will be your Customer. You may have multiple Customers set up for an agency, for example if you are working with multiple contracting offices within one agency, but that setup is not important for this discussion.

Let’s assume we are awarded a contract with NOAA to provide IT Help Desk Support. We will first create a new Customer if NOAA is not already created in the system as a Customer. After the Customer is created, we will add a Job. Notice when you go to add the job in QuickBooks, there is a requirement for there to be a Customer associated with every Job. Once we enter our Job Name and any other relevant information about the Job, we can save our Job and now have our contract set up in the accounting system.

With our contract set up in the accounting system, we can begin to identify and accumulate direct costs by contract, in order to satisfy the criteria for our Pre-Award Survey. The next step in our process will be charging our direct costs to the appropriate contract when entering bills, journal entries, and other transactions into the accounting system. For example, the NOAA IT Help Desk contract may require the purchase of computer equipment specifically for that contract. When the computers are purchased, and the vendor sends a bill for the computers, that bill must be coded to the contract in to identify and accumulate direct costs by contract. In QuickBooks, when creating a Bill and entering the detail information, there will be a column labeled “Customer: Job”. If the Bill is for a direct cost, then it needs to have a Job specified. In this case, we would enter the IT Help Desk Support Job name into the Customer: Job column, which is telling the system that this expense is associated with that Job.

If creating a journal entry to record direct costs, the same concept applies. There will be a column in the journal entry screen also labeled “Customer: Job”, where you would specify the appropriate contract if you are recording direct costs. As part of a monthly review of your financial statements, you can run a Profit & Loss by Job report. When reviewing this report, you should ensure that all direct costs are in fact record to a specific Job. This will help ensure you are following the steps to meet Criteria 2b. If you are using a project-based accounting system such as Unanet or Deltek Costpoint, you can actually set up the system so that charging to a direct cost account requires a project input. Unfortunately that functionality does not exist within QuickBooks, but failure to charge direct costs to a project can easily be spotted with a proper review of your month-end accounting reports.

We will close with a couple additional points to consider. The first is that for direct costs to be properly charged to contracts, any other systems or source documents in use should be designed properly. For example, your timesheets and expense reports need to be designed so that employees can select which contract they are charging their time to or which contract a certain expense was related to, if a direct expense.

The final note is that if you are having difficulty charging expenses to certain contracts, you might need to circle back to Criteria 2a, which specifies that you need to properly segregate direct costs from indirect costs. Assume that your company operates in Maryland, but has two government contracts in Texas, and you want to have office space for the billable employees in Texas. You may have determined this to be a direct cost since the rent expense exists solely to support these two contracts. When you go to identify and accumulate this direct cost by contract, you may be having trouble determining how to record this cost to each of the contracts. The reason for the difficulty is that in almost all cases, this rent expense is going to be an indirect expense given the nature of the charge. Therefore, we have failed to properly segregate between direct and indirect costs and need to focus on properly implementing that first criteria. As we will discuss throughout this series, passing the pre-award survey is not about just about software and configuration. Policies, procedures, and training of personnel are just as critical components to maintaining an adequate accounting system.

LRZ Consulting is a full-service outsourced accounting and bookkeeping firm specializing in the government contracting industry. We provide support for QuickBooks, Deltek CostPoint, and Unanet Financials and assist with maintaining a DCAA approved accounting system. If you are looking for a free comprehensive analysis of your accounting system, please contact us here.

Four Signs Your Government Contracting Business has Outgrown QuickBooks


QuickBooks is the most widely used accounting software for small businesses, and for good reason. QuickBooks is easy and efficient to use, it gets constant upgrades and patches to improve functionality, and can be a very powerful tool if used properly. However, if you are a government contractor focused on growth, you will likely reach a point in the lifecycle of your business where you have outgrown QuickBooks and require a more powerful and sophisticated accounting system that is designed specifically for the government contracting industry. The following are four areas that might trigger the need for a change in accounting systems. There are no hard and fast rules for when you should change from QuickBooks, but a combination of the following might help you identify an appropriate time to make the change.

Cost-Reimbursable Contracts: Don’t let the marketers fool you – you do not need an accounting system more robust than QuickBooks in order to pass a DCAA Pre-Award Accounting System Survey. DCAA will be looking at whether you can properly accumulate, segregate, and record costs on government contracts. This can all be done within QuickBooks, and you can learn more about passing your pre-award audit here. With this in mind, don’t let the possibility of a cost-reimbursable contract, or an IDIW that requires an approved accounting system, be the reason you switch from QuickBooks to a different system.

However, once you actually have that cost-reimbursable contract awarded and operating, your invoice generation becomes more complex and your need to track indirect rate calculations closely becomes far more important. You can stay on QuickBooks and still accomplish this, but it becomes a lot more difficult and requires quite a bit of manual work. The more robust accounting systems like Unanet and Deltek Costpoint have features that will allow you to set up your rate calculations, including pools and bases, and then the system does much of the work for you. Those systems will also produce outputs that can be used to assist in the preparation of your incurred cost submission at the end of the year.  

Volume Increase: There’s no headcount or revenue level that suddenly makes it imperative that you switch off QuickBooks. But eventually, as you grow to a certain size, a more robust accounting system built specifically for government contractors will end up saving a significant amount of time for your finance and accounting team. Functions such as processing labor allocations, generating project reports, and creating invoices will all become easier, quicker, and more accurate with an accounting system such as Unanet or Deltek.

Consolidation & Multiple Entities: Consolidation is one area where QuickBooks is lacking. Rightfully so, as it was built for the small business in mind, and most small businesses do not need to perform consolidations. If you have subsidiaries or multiple entities that require consolidation and are using QuickBooks, it will probably be necessary to do manual consolidations outside of the accounting system itself. This can be a tedious and sometimes burdensome task, that could also lead to errors. When you switch from QuickBooks to a higher-level accounting system, that new system will likely have the functionality to house multiple companies or entities within one system. The system can then be programmed to perform a consolidation within the accounting software itself, taking out the majority of processing and reducing the risk of any manual errors.

Forecasting and internal reporting: QuickBooks does have a budgeting function within their software, but it is limited in functionality and of course is not built specifically for the government contracting industry. If you are looking for more advanced forecasting and reporting, QuickBooks will likely fall short at a certain point. Areas and functions that will benefit from a more advanced system include the following:

  • Resource planning: As a government contractor, specifically under Time & Material type contracts, you want to avoid leaving money on the table or exceeding funding on any of your contracts. This often requires careful resource planning. The robust accounting systems will let you schedule out budgeted, or planned, hours throughout the course of the contract or contract period. This can be done at the individual level and can factor in headcount, expected paid-time-off, holidays, and a number of other factors to properly forecast and track you incurred cost.
  • Limitation of Costs: Certain contracts will require you to notify the government when you reach a certain point of incurred costs in that specific contract. Instead of having to manually track this, you can set triggers so that the accounting system alerts you when you reach these points.
  • Strategic Planning: As a business grows, there will be more contracts, more service offerings, and more divisions. It will become more important to closely monitor margins. It is also critical to monitor which contracts, divisions, and services are generating the most profit so that resources can be properly allocated.

These are just a handful of the items you will want to consider when evaluating your accounting system. QuickBooks is drastically cheaper than the other accounting systems mentioned in this article and pretty much any advanced or industry-specific accounting software. If implementing a new system, you will incur significant costs for the implementation itself and ongoing license fees. Your current staff might also require a lot of training under the new accounting system. But if you have grown to a certain size and complexity and QuickBooks is no longer meeting all of your needs, the long-term benefits of switching off QuickBooks may far outweigh the cost of the new system.

LRZ Consulting is a full-service outsourced accounting and bookkeeping firm specializing in the government contracting industry. We provide support for QuickBooks, Deltek CostPoint, and Unanet Financials. If you are looking for a free comprehensive analysis of your accounting system, please contact us here.

Passing your Pre-Award Survey – Segregating Direct & Indirect Costs

Over the past few years, we have seen a dramatic increase in the number of solicitations requiring a contractor to have an “approved accounting system”. A recent example is the draft Request-For-Proposal for the CIO-SP4 Contract, which requires contractors to maintain an adequate accounting system. We have also seen more and more large prime contractors pushing this requirement down to their subcontractors. For smaller contractors, this means that at some point, there is a good chance they will need to go through a Pre-Award Survey of Prospective Contractor Accounting System performed either by the DCAA, another cognizant agency, or an independent CPA firm. Although this may seem like a daunting task for smaller contractors, it is a manageable undertaking with proper guidance. Simply put, the review is going to look at whether your accounting system, policies, and procedures are designed and functioning properly to comply with requirements set forth by government contracting regulations.

To assist with preparing for a survey, we are going to review in a series of articles the Evaluation Checklist criteria on the Standard Form 1408 (SF 1408), which serves as a guide for helping you prepare for the audit. These articles are meant to serve as a starting point, not a master guide. If this is your first time through the audit process and you lack in-house personnel with expertise in this area, I would encourage you to seek out a consultant to help prepare for the audit. As we go through the Evaluation Checklist, we will also demonstrate a practical example for how to address each item in your accounting system.

In each article we will tackle one of the checklist criteria, and discuss the principles behind the criteria and how to begin putting processes in place and setting up your accounting system in order to meet the criteria. The checklist criteria we will discuss this week is:

2a. Proper segregation of direct costs from indirect costs

FAR 31.202 defines a direct cost as “any cost that can be identified specifically with a particular final cost objective”. For most contractors, the distinguishing factor between a direct and indirect cost is based on whether a cost is directly allocable to a contract. If a contractor employs a Subject Matter Expert, and that employee works on a specific contract and charges their time to that contract, the result is a direct cost of that contract. Alternatively, when that Subject Matter Expert takes vacation or performs administration functions, those hours can’t be directly assigned to any one contract, and is therefore an indirect expense.

There are two key components to bear in mind when properly segregating direct costs from indirect costs. The first component is establishing a method for the costs to be distinguished between direct and indirect based on the source document and any systems in place. The second component is how the accounting system is designed to segregate those direct costs. Most contractors will have some component of labor that is a direct cost. To properly segregate costs, the timekeeping system must allow for employees to record their time to direct charge codes as well as indirect charge codes. Similarly, purchase orders and expense reports should be designed so that employees can specify whether the cost is direct or indirect, and what contract the purchase relates to for direct costs. The second component to segregating direct costs from indirect costs relates to how the accounting system and chart of accounts is set up. The accounting system should have separate accounts for direct expenses vs. indirect expenses.

Putting the criteria into practice in your accounting system

A starting point for meeting these criteria is a properly designed chart of accounts. You want a numbering sequence for your chart of accounts that clearly distinguishes between direct costs vs. indirect costs, and allowable costs vs. unallowable costs. A common method for numbering your chart of accounts is as follows:

5000-5999: Direct Costs

6000-6999: Fringe (indirect)

7000-7999: Overhead (indirect)

8000-8999: General & Administrative (indirect)

9000-9999: Unallowable costs

This design allows for a clear segregation between the different types of costs. To take the example further, instead of having a general “Salary” or “Labor” account, you will likely have a combination of the following accounts:

– Direct Labor (5000 series)

– Holiday, PTO (6000 series)

– Overhead Salaries (7000 series)

– G&A Salaries (8000 series)

– Unallowable Labor (9000 series)

Note how each of these accounts should be within the first numbering sequence to properly segregate the costs. If you are using QuickBooks, you likely will want to classify your 5000 series as “Cost of Goods Sold” for the account type. This allows you to further build in the functionality of segregating direct costs and making a clear distinction between direct and indirect costs. QuickBooks however won’t allow for a further breakdown of account types where you could separate Fringe, Overhead, G&A, and Unallowable. All of those accounts will need to be set up in your chart of accounts as an account type of “Expenese” or “Other Expense”. You can however use parent accounts – for example you can create an account 6000 that is called Fringe Expenses, and then not charge to that account, but have all other fringe accounts as a sub-account of the parent 6000 Fringe Expense account. More robust accounting systems such as Deltek Costpoint & Unanet Financials will give you the functionality to classify an account as direct, fringe, overhead, G&A, or unallowable based on the pools and bases you set up within those systems, but that goes beyond the scope of what we will talk about today, and is certainly not a requirement to meet the checklist criteria being discussed here.

As a final note, it is important to keep in mind that with all the evaluation criteria, to pass the review you must do more than just set up the accounting system properly. Setting up different accounts for direct and indirect expenses is the first step, but there must also be policies and procedures in place, as well as systems and processes built around the accounting system to allow for proper segregation of costs. This requires building a timekeeping system that allows charging to proper categories of labor and specific contracts. In addition, this requires training personnel, specifically accounting personnel, so that they are familiar with the principles of government contract accounting, and can correctly distinguish between direct and indirect costs.

For example, if the CEO of a company is not billable on a given contract, but perhaps they spent their entire day speaking with the CO for that contract and managing their employees on that contract, the CEO may logically think that their time should be charged to that specific contract. This would not be correct though, as they are performing overhead and administrative functions that are not directly allocable to the contract, and should not be charged as such. Personnel must be trained to charge their time properly, otherwise the setup of the accounting software itself to segregate direct and indirect costs becomes meaningless.

Please send an email with any of your questions and look for future articles in the series. Click here to see our services for government contractor accounting.

6 Basic Insurance Policies Every Small Business Should Consider

Insurance policies

When you open a business, you expose yourself to legal liability and risk. One of the most overlooked parts of opening a business is purchasing the correct insurance to cover and protect it. While there are many great insurance options for small businesses, it can be daunting to figure out which you actually need for your business. Here are six common small business policies worth considering:

General Liability coverage

General liability insurance (GL) provides essential protection for your business. Sometimes referred to as small business or commercial liability insurance, it protects against bodily injury claims, damage to the property, and personal injury.

Who should purchase? Those who interact with clients in person, use advertising, utilize third-party locations for business, or are required to have this coverage for a project.

What’s the cost? Pricing is a factor of industry, location, business size, and the degree of coverage you need; Hiscox reports that an IT consultant who makes $100,000 annually might pay $350.

An important note: for small business owners who have hired staff, GL usually will not cover worker’s compensation (if an employee injures themselves on the job), nor will it cover Personally Identifiable Information (PII); so additional insurance should be considered for employees.

Worker’s Compensation

If you’re even considering hiring employees, you should get quotes for Worker’s Compensation insurance (which typically can be appended directly to an existing policy). This will cover your business if one of your employees is injured or dies on the job/as a result of their work.

Who should purchase? Those with part-time and/or full-time employees.  Even employees who are a “low risk” for work-related injuries could slip and fall or develop carpal tunnel syndrome. While these seem minor, they can be costly to a business; you could even be liable to cover lost wages. The National Safety Council reports that the average cost of a worker’s comp claim is $40,000.

What’s the cost? The degree of risk must be considered for a quote from an insurance provider; Insureon reports that a low/medium risk business might pay $47 monthly.

Business Owners Policy

A business owners policy (BOP) is usually added to GL insurance to ensure the business equipment and property are covered as well. This can often be customized to include vehicle liability insurance, office insurance (for fire or business interruption), and/or electronic data loss.

Who should purchase? Those who own a piece of property or valuable business equipment required for work.

What’s the cost? It varies widely based on industry, location, and business size; Hiscox quotes a Business Consultant in MA at approximately $760 annually.

Professional Liability Insurance

With more people consulting now than ever before, professional liability insurance has become increasingly popular. Sometimes referred to as Errors and Omissions Insurance (E & O), it protects against the risk of professional services. In other words, it shields the business if you’re sued by a client for making a mistake, and will cover costs to defend yourself or reach a settlement.

Who should purchase? Those who act as consultants, advisors, etc.; anyone who provides professional advice or service to clients.

What’s the cost? It varies based on industry, location, company size, and the amount of coverage you need. An IT consultant in California, for example, is projected to pay $441 annually for professional liability insurance.

Property Insurance

Property insurance, sometimes called commercial property insurance, simply covers a business’ real estate assets and its contents.

Who should purchase? Those with a physical location for their business (whether leased or owned), or who have products, inventory, or valuable business assets that are crucial to running the business.

What’s the cost? Coverage is expansive, ranging from small standard policies targeting specific risks/locations to much larger plans that include natural disaster coverage.

Cyber Security Insurance

Cybersecurity is a rapidly evolving field, as serious breaches have reached an all-time high. Cyber attacks could drain all valuable data, leaving one unable to perform operations or access any systems. They may also be liable for any personal health or identifying information stolen by hackers. Cybersecurity insurance protects businesses against these computer-related crimes, losses, or simply if a laptop containing important data goes missing.

Who should purchase? Those who maintain any sensitive and/or personal information and those who accept credit cards or other forms of digital payments.

If you have any questions or need assistance with small business insurance, please contact LRZ Consulting.

5 Business Risks Your Company Should Plan For

It’s no surprise that COVID-19 has severely affected the business community among many others. While there have been major recessions (e.g. the financial crisis of 2007-2008), this pandemic has been the most crippling to date. The impact has been wide-ranging; some companies were more prepared for drastic changes like indefinite remote work, while others have worked hard to adapt. Many have also experienced decreased revenue, or even been forced to close their doors permanently.

While it’s difficult to completely prepare for an event of this magnitude, it’s essential to assess and plan for potential risk factors. For publicly traded companies, these are listed in their annual 10-K report, as required by the U.S. Securities and Exchange Commission (SEC). This form gives a clearer picture of everything a company does, as well as any risks it faces. While your business may not require as detailed of a report, it’s encouraged to establish a list of the most relevant risk factors. Let’s explore five risks to prepare your company against:

Concentration Risk

This “concentration” may be in revenue, customer, vendor, material, or supply-chain; all pose a significant risk if something adverse happened within that concentration. While revenue and customer concentrations are the most commonly discussed, that of a vendor or supply-chain could pose just as large of a problem. A recent example of this would be the tariffs imposed on Chinese goods, which disrupted a number of supply chains and impeded companies from offering competitive prices while still earning a reasonable margin.

Financial Condition

In many cases, a company’s financial status would be the most urgent risk factor to address. Liquidity and debt service are critical factors to consider, as issues in these areas could derail future business plans and put the entire company in jeopardy. Some business owners tend to focus solely on cash flow, but this metric alone doesn’t guarantee that a company has sufficient liquidity or a long-term path to profitability.


Competition typically falls into two buckets – that within an industry, or 1:1 competition with another company. For the former, this may mean you experience many competitors when acquiring a new customer or contract, which can affect price or a number of other factors. A well-known example of the latter is the expansion of Walmart and Amazon; countless businesses thrived in their local markets, but took a huge hit when a Walmart or Amazon entered their industry or geographical market.

When evaluating this risk factor, consider potential future competition as well as present, since changes to the industry or economy often alter a competitive landscape. Take Zagg Inc., for example. It’s a publicly-traded company that primarily sells phone accessories (e.g. screen protectors, charging stations, and wireless headphones). While they have a significant market share in the screen protector industry, some of their other product lines have decreased significantly over the past few years due to Apple’s expanding market share. Zagg must now decide whether to diversify their offerings to reduce dependency on screen protectors sales, or to focus on retaining their existing market share.

Products & Services

The above example with Zagg Inc. highlights another significant risk factor: the breadth of products and/or services a company offers. It’s essential to consider if your product or services could be overshadowed by a bigger player, or become obsolete altogether (e.g. if a technological advancement disrupts your industry or offering). Obviously no one has a crystal ball to know what the next radical change to an industry will be, but with a potential Uber, Amazon, or Tesla always looming it important to be future-focused.

Key Personnel

The final risk factor we’ll touch on is when a company is heavily reliant on key personnel. This could be anyone from the CEO to an engineer, but for most small businesses it’s typically one of the company’s owners. This is even more common when a business is owned by one individual who also serves as the CEO or President, performs multiple key functions (e.g. generates most of the sales or has the most industry expertise), and may also handle many administrative tasks.

How to Create an Effective Month-Close Process

You’ve worked hard all month processing transactions and invoicing customers, and now it’s time to produce the end result: a set of financial statements that management can rely on. Performing this month-close process is one of the most important (and most time-sensitive) functions of an accounting department, mainly involving higher-level accounting and finance personnel. With the right approach, it can be a smooth and timely process that also allows for value-adding analysis of the financial statements. Let’s explore some of the key components required for a successful month-close process.

Create a calendar and checklist

Closing the month can be daunting for an internal accounting department, but using a month-close calendar and checklist helps to properly plan, stay organized, and ultimately meet the target month-close date. Many departments aim to close each month ten to fifteen days after the end of that month. Timing varies by organization, but the information typically becomes outdated after fifteen days and doesn’t allow enough time to analyze or make proactive decisions based on the financial results.

It’s important to include any tasks that can be completed before the end of the month in your calendar. For example, manual spreadsheets or reports that take time to roll forward to the next month can be prepared in advance, allowing more breathing room to meet closing deadlines. Certain accounting tasks can also be done prior to the end of the month; record as many transactions as possible, and implement processes so most of your billing and accounts payable are done beforehand. While this isn’t always possible depending on your industry and billing cycles, it’s still important to evaluate all tasks and determine what can be done ahead of time to help with a timelier month-close.

When you finally reach the end of each month, have a timeline prepared for completing all remaining tasks (e.g. journal entries and balance sheet reconciliations) by your end goal. If there are various interdependencies in the closing process, it’s even more imperative to utilize your calendar to assign tasks and hold everyone involved accountable.

Develop flash and other ad-hoc reporting

Beyond performing as many tasks as possible before the end of the month, another way to alleviate the month-close time crunch is by stretching out the closing period. This can be done without hurting the business if proper flash reporting and other interim deliverables can be created in advance of a company (1) completing the full month-close, and (2) delivering statements to management and other key personnel. Examples of flash reporting include sales reports, job profit reports, interim payroll data, and collections trends. The key is to set up your processes so that the data in these reports is accurate and actionable, providing management with the information they need to immediately evaluate financial results without the final month-close statements. In return, management may allow a longer closing period.

Automate your processes

Accounting technology and applications have improved immensely over the past ten years, and with these improvements come new tools that enable automation to help simplify the month-close process. The tools that your organization can benefit from most will vary depending on the nature of your operations, the type of reporting requested by management, the volume of transactions, and a number of other factors, but there are countless tools out there designed to meet a variety of needs.

Build easy-to-use spreadsheets

Even with the most sophisticated accounting system and month-close applications, you’ll likely still depend on Excel spreadsheets. It’s essential to build these spreadsheets yourself so you can ensure they’re replicable each month, free of errors, and easy for a manager to review if needed. If you choose to use spreadsheets inherited from someone else, you’d have to review a number of formulas, potentially reformat the worksheet, and make a lot of manual changes that could easily be calculated using formulas if setup correctly in the first place. Take the time to build your spreadsheets correctly and you’ll be relieved you did when the month-close arrives.

Design the close to create value-added analysis

Creating value-added analysis may be one of the most important and often overlooked tasks of a successful month-close. Although closing the month results in an accurate and reliable set of financial statements, it shouldn’t end there. The process and resulting financial statements should be a mechanism for evaluating results, making informed decisions, and ultimately increasing the value and profitability of the organization. For example, your month-close package may include a Budget vs. Actuals report; what are you actually doing with that report and how is it helping your organization? The financial statements should facilitate discussions and assist management in making strategic decisions, not just highlight how much money was made. Efficiency and accuracy during the month-close are important, but the process should be built with the goal of value-added analysis in mind.

Evaluate your accounting system

One final consideration to make is whether your existing accounting system is meeting the needs of your organization. Implementing a new system is often time-intensive and expensive, especially for larger businesses. However, a new system could help automate some of the current time-consuming and manual processes. It’s recommended for accounting and finance departments to periodically analyze their accounting systems and determine whether it’s meeting the needs of their organization, or if implementing a new one should be considered. QuickBooks is a very powerful system, for one example. When used the correct way, it leads to an efficient month-close and excellent reporting. But at a certain volume, level of complexity, industry, etc. your business might outgrow it and need a different tool. So if you’re evaluating new accounting systems, keep the month-close process in mind; it’s vital to the overall accounting and finance function.

If you have any questions or need assistance with your month-close process, please contact LRZ Consulting.

Does Your Business Need an External Audit?

A common question we receive at LRZ Consulting is whether a company should have their finances externally audited. This involves an independent examination of a business’ financial statements (typically by a CPA firm), determining if they’re represented fairly and accurately. In simpler terms, it’s a stamp of approval. It also typically allows parties to feel more comfortable relying on these financial statements to make a significant decision (i.e. a bank considering providing a loan, or an investor valuating a company).

If you’re considering an external audit of your company’s financial statements, here are four factors to take into account:

Does a legal or contractual obligation exist?

The first and most obvious question that needs to be addressed is whether a legal, contractual, or statutory obligation to obtain an audit exists. Some examples of this include a company that:

  • Has a bank loan and the agreement requires the company to submit audited financial statements to the lender on an annual basis within 90 days of year-end
  • Is publicly traded and is required to obtain an audit under SEC regulations
  • Operates under a partnership agreement which requires an annual audit
  • Is a non-profit and receives $2M annually in federal funds through grants, so under the Single Audit Act is required to obtain an audit

If your organization is legally required to get an audit, then the decision has already been made for you; it’s time to figure out what kind you need (i.e. if you require a Single Audit as a non-profit, or need additional procedures performed as a result of SEC oversight) and any deadlines associated. For those without a contractual right, the decision whether to obtain an audit becomes subjective, based on the goals and other circumstances surrounding the company. Let’s touch on a few of those key decision points next.

Who are the statements intended for?

The next questions you’ll want to ask is who are the audited financial statements intended for and who would they would benefit? Key management or internal owners that have access to these audited financial statements would undoubtedly benefit, for example. They’d likely be reviewing the statements on a periodic basis, but relying on the accounting personnel preparing the statements for accuracy. Since audits require an independent third-party (usually a CPA firm), they can serve as a way of corroborating this work by the internal accountant. Similarly, knowing that the financial records will be looked at by an external party can deter the internal accountant from performing any fraudulent activity. (Note that while an audit isn’t designed to detect fraud and provides no assurance that fraud hasn’t occurred, it still can serve as a strong deterrent and/or help uncover fraud that’s already occurred.)

Other stakeholders you could have an audit done for are inactive owners or investors who may need a similar assurance that the financial results of the company can be relied on. This is a greater need when there are multiple investors or owners, or when the entity is a joint venture between two parties and one is responsible for managing financial statements. The inactive partners, investors, or other parties may want confirmation that the statements are accurate, and an external audit would be a way to achieve this. If the company is on a bad trajectory but finances don’t accurately represent that, an audit may uncover this and save investors a lot of money before the business goes deeper into a hole.

Another group that may want an external financial statement audit is non-profit organizations. Depending on the non-profit charter and a few other factors it may not be required, but if they’re receiving large contributions from the public and want to continue to do so, an audit could be extremely beneficial. Most big donors will want to ensure that the non-profit they’re potentially donating to is using their funds as promised, and an audit would provide that comfort.

Am I preparing for a change in ownership or another significant event?

You may not currently have any external parties that need to see audited statements, and you may have decided that it isn’t worth the cost to do one solely for internal purposes. But if your business will be going through a significant change in the future, it would help to be proactive and have audited financial statements readily available. Some “significant” business changes would include:

  • The sale of a business or of partial ownership of a business
  • A capital raise to bring on new investments
  • Obtaining a line of credit or loan from a financial institution

In many cases, a financial statement audit is not required to achieve one of these outcomes. However, the external parties involved in a potential sale, capital raise, loan, or other major event will likely be evaluating your financial statements during their due diligence procedures, so an audit makes your statements (and therefore your company) immediately more reputable. This could simplify the sale or loan process and may bring additional parties into the mix that may not have been interested prior to the company having readily available audited financial statements.

Are lower levels of assurance sufficient for my needs?

A financial statement audit isn’t the only type of external evaluation that companies experience; there are various levels of assurance and various functions that can be performed surrounding financial statements. Two primary options beyond an audit are a financial statement review or compiled financial statements. We won’t go into the details of the level of assurance provided with each, but at a high level, an audit provides the highest level of assurance, followed by a review, then a compilation. All three result in a set of issued financial statements and a report from the external accountant, but the review and compilation reports will explain that fewer steps were performed by the external accountant and there’s less assurance being provided.

If you have any other questions, or need assistance in deciding whether to obtain a financial statement audit, please contact LRZ Consulting. (Note: since we don’t perform any of the services discussed, we guarantee you’ll receive an unbiased assessment of your company’s needs).

Online Bill Payment Systems (part 2)

In the prequel to this post, we discussed traditional accounts payable and bill payment systems as well as their downsides. For part two, we’ll highlight an effective system for small businesses as well as common concerns people have when considering implementation. This example will follow one accounting system (QuickBooks) and one bill payment system (, but note that this process can be accomplished with a variety of platforms.

System and processes overview is an industry leader, having over $70B of payments processed through their platform. Users are required to pay for the subscription; costs include a flat rate and additional fees based on number of users/payments processed. For a quick overview of the process:

  1. Invoices get scanned, emailed, or uploaded into your “inbox,” at which point they can be coded by a bookkeeper or other member of your team
  2. The coded invoice is routed to a manager or the owner for approval and processed for payment
  3. initiates an ACH from the company’s bank account, or sends a check directly to the recipient on your behalf
  4. transfers the data to your accounting system (so you don’t have to enter any data in the accounting system manually)

An advantage of the platform is that it integrates with a number of accounting systems, including QuickBooks and QuickBooks Online. You can link your existing QuickBooks information (vendor data, terms, chart of accounts, customers/projects, etc.) to the platform, enabling all transactions entered within one system to transfer to the other. (Note this will vary depending on the system you are using; it may be an automatic process that runs in the background, or one that requires the click of a button when logged in.)

Common questions and concerns

Now that you’re familiar with the process, let’s address a few concerns we often hear from companies evaluating whether to implement a bill payment system:

1. “I’m concerned about security.”

The major bill payment platforms all have best-in-class security protocols, as well as SOC reports that are available to the public. More importantly, they have additional built-in security protocols related to logging in and making payments. We recommend using dual-factor authorization when logging in and submitting payments to enhance security protection – it’ll significantly reduce the risk of an attack on your server, or computer leading to fraud perpetrated through the platform.

2. “Some of my vendors only take checks.”

The online bill payment system eliminates the need to write checks yourself, but you can still use them as a payment method – the platform will just generate a check and send it directly to the recipient for you. So under this system you don’t have to handle checks yourself, but vendors can still receive checks if they so choose.

3. “My employees or management are not good with technology.”

The major platforms have very intuitive interfaces that even the least tech-savvy individuals can utilize. Most also have smartphone apps available, if you’re more comfortable using a handheld device versus a computer.

4. “I don’t want to pay for another subscription fee.”

The fees for most platforms are manageable, but you have to factor in the time saved managing the accounts payable function (which helps decrease headcount cost). If you outsource your accounting or bookkeeping functions, most firms will foot the bill for the platform because it’s more efficient for processing on their end. They may even have a discount on the subscription fees that can be passed on to your company.

5. “I need multiple people at my company to approve invoices.”

The major platforms allow you to add as many users as you need with any workflow to the system. Additional costs may be added based on the number of users, but they’re reasonable. You can give different levels of approval permissions to project managers, supervisors, division presidents, or anyone at your organization. If you want a specific invoice routed to four different people for approval, that can be done. Conversely, if you’re an SBO who inputs and processes everything yourself, you can follow a more simplified workflow and skip the approval process altogether.

6. “I don’t know how to integrate this with my accounting system.”

The service team performs the initial integration and can assist you with getting started on their platform at no additional cost. They also have a fantastic support team as well as a number of resources on their website to assist in making a smooth transition to their platform.

If you’d like to learn more about bill payment systems or have any questions, please contact LRZ Consulting.

4 Tips for Working Remotely

With the unfortunate rise of the COVID-19 pandemic, more employees are working from home than ever before. Since we’ve always operated this way at LRZ, here are some tips for working remotely that have been helpful for us over the years.

Invest in a comfortable setup

Can’t stress this one enough. If you’re working eight hours a day cooped up in the same environment, even the smallest discomfort can become very irritating. I used to experience minor back pain every day; nothing significant enough to see a doctor about, but it was there. After trading in my old desk chair for a newer model, the pain was gone. It didn’t take long for me to determine the old chair with poor neck support had been the problem all along. Moral of the story: take the time to curate a comfortable setup for yourself. Especially since many of us are likely working from home indefinitely, consider purchasing a standing desk, reevaluating your chair, or getting something small like a cushioned mouse pad; whatever will keep your workspace comfortable. Similarly, make sure you have the necessary computer setup. I’m personally most efficient with three monitors and a wireless mouse/keyboard.

Know your phone and video-conferencing etiquette

Video calls have become more prevalent over the past few years, even since before the pandemic hit; I’m sure many of you have had a Zoom subscription for quite some time now. But since March, it seems that half of the day is spent on unfocused or inefficient calls. Raise your hand if you’ve been on a call where the host dials in over five minutes late, or someone doesn’t realize they are muted/unmuted, or there’s lots of background noise and it’s hard to hear, the list goes on and on. It can be very frustrating.

We try to follow two basic but important principles:

  1. If you’re the meeting owner, act like it. You have to be on time to start the meeting on time. Take a moment at the beginning of the meeting  for housekeeping items – remind everyone to mute themselves when not speaking (if there are a lot of participants) and lay out any other guidelines. Lastly, recap the agenda and goals of the meeting. This will make it easy to get the discussion back on track if it gets out of your control later on (be honest, we all have peers who commandeer meetings or steer the conversation off topic). Just remember that everyone in the meeting benefits when someone steps up as a leader.
  2. Don’t be afraid to speak up. This could include inserting a question, or (politely) asking someone with lots of background noise to mute themselves. Believe me, the other participants on the call will be internally thanking you for speaking up, rather than having to sit through a call full of technical issues.

Set a schedule and stick to it (but don’t forget to take breaks)

One of the most necessary traits to have when working remotely is discipline. Establish guidelines for what constitutes a “normal” workday – would your employer be comfortable with you working a more flexible schedule that dips outside the average nine-to-five, or do they expect you to be available strictly during those hours? My personal recommendation to employers: if it’s not imperative for your employees to be online for specific hours, then allow them to have some flexibility. We as humans are more efficient when taking periodic breaks, so go get a workout in, do a hobby, or cook a homemade meal for yourself – it’s almost guaranteed to boost your productivity.

Work on your green thumb

It may sound silly, but try bringing some plants into your workspace. You don’t need an expansive garden that requires a ton of upkeep; even a single succulent can breathe some life onto your desk. There’s countless health benefits too – having plants in your home can lead to better air quality, increased memory and focus, and reduced stress. (And we personally just love the way they brighten up the room.)

Turning data into information you can use

By Andrea Dunathan of Dunathan Consulting

In a recent conversation with a fellow consultant (Cathy Bamji of, Cathy used a phrase that stuck with me: turning data into information.

It’s surprisingly easy for businesses to accumulate data of all sorts:

  • customer contact data
  • website analytics data
  • financial data
  • employee engagement data
  • and so on

What’s challenging is to put that data to use to make well-informed decisions.

Raw data can be overwhelming

The temptation for many business owners is to make decisions on gut feelings, instincts, and guesstimates. That may be easier than analyzing the data to turn it into meaningful information, but it also means you could be running your business on faulty assumptions. You don’t want to discover, too late, that things are not going as well as you thought.

So how can a busy business owner make better use of all that data, without hours of painful number-crunching? One possible solution is to look at how the data is currently presented.

Data may not be the problem

The problem is often not in the data itself, but in how it’s entered into the system, and the design of the reports that summarize and present it to the user.  Small changes in format can make a big difference.

For example, I was reviewing some financials with a restaurant owner who was struggling to earn a reasonable profit. We got into a discussion of which of his operational areas (table service, deli counter, bakery), and which product lines within those areas (such as deli meat vs. fish vs. cheese), were most profitable.

Unfortunately, his accounting system was not tracking sales by operational area or product line.  So when we looked at his profit and loss statement, we couldn’t tell how much of his gross profit came from which areas or product lines.

His cash register did track sales by those categories, so we asked the accountant to start entering costs and revenue by category, instead of at the summary level.  This change will provide the owner with a simple financial report that will show gross profit for each product line, with totals by operational area, so he can monitor profitability much more effectively, with no extra number-crunching required.

Taking the time to figure out what kind of informational report will be useful to you, can guide you on figuring out what type of data you’ll need. This type of planning allows your system to do the work for you, with no number-crunching required on your part.

Tip: if you are working with an accountant, make sure to discuss your goals, and the information you need to make decisions, so that the data can be tracked and reported appropriately.

Data does require proper planning

Although this example uses financials, this same process can be used in any system that supports any area of operations.  A little planning can help you make much better use of your:

  • marketing data
  • human resources data
  • customer data
  • and so forth

The key is to think about the information you need to help you make better decisions. Once you’ve identified the questions you have, you can design your data capture and systems reports to give you those answers easily.

If you love the idea of doing this in your business, but aren’t sure where to start, contact Dunathan Consulting to get some ideas for turning your data into useful information.

Dunathan Consulting helps rapidly growing businesses make the best use of their people, processes, and technology to support the business’s growth and increase its future sale value.

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