Category: Finance

The gross profit margin is the percentage of revenue left after the cost of goods sold (COGS) has been deducted. It is a crucial business metric that illustrates how effectively a company uses its sales revenue to cover its expenses: the higher your gross profit margin, the more money you make from each sales dollar.

A gross profit margin is also critical in business because it indicates how much of your revenue is retained after covering the cost of goods sold and operating expenses.

It tells how well your company is performing and how efficiently you use your sales dollars to make money for your company. The higher the gross profit margin, the better off your company will be.

If you’re a business owner, it’s essential to understand what is considered a good gross profit margin. Gross profit margin is often confused with net and operating margin, but the three terms have different meanings. Let’s dive into the details.

What is Gross Profit Margin?

Gross profit margin measures the profitability of a company’s sales. Gross profit is the difference between revenue and cost of goods sold (COGS), which includes all direct costs associated with producing products or services, such as labor and materials.

The gross profit margin is one of the most important financial metrics for any company. It measures how well it can turn revenues into profits and shows how efficiently a company generates cash from its operations.

A high gross profit margin means that a company’s products are selling at a premium price or that it has a high level of operating leverage (that is, it earns more income on each dollar of sales). A low gross profit margin indicates that the company must work harder to make revenues.

A company’s gross profit margin depends on several factors, including its pricing strategy, the availability of raw materials, and the efficiency of its manufacturing processes. Gross profit margin varies significantly based on industry and product type.

 For example, pharmaceutical companies often have very high gross margins due to their ability to control manufacturing and distribution costs through patents. Food manufacturers typically have much lower margins because they don’t own any intellectual property rights over their products. They must compete with many other companies that sell similar items at lower prices than they can charge.

Why Does Gross Profit Margin Matter?

Gross profit margin is an essential metric for any business because it tells you how much money you have left to pay your operating expenses and make a profit. 

If your gross profit margin is low, a large portion of your revenue goes towards paying for your COGS, and little remains after covering these costs. This means you’ll need to raise the price of your products or services to maintain adequate profitability or find ways to cut costs so that less money goes towards covering direct costs like materials, labor, and overhead expenses like rent and utilities.

Gross profit margin gives you an idea of how efficiently your business operates. It shows how much money you make per sale (before deducting expenses or taxes).

You can use gross profit margin to compare different companies within the same industry or to compare yourself with competitors in other sectors.

Here are five more reasons why gross profit margin matters:

It measures how much money you make on each sales dollar. The higher your gross profit margin percentage, the more money your business makes on every dollar of sales. For instance, if you have a 50% gross profit margin, you make half of your total revenue as pure profit. This can be a good thing because it allows you to keep more cash in the bank for future investments or expansion efforts.

It shows how much your sales go toward paying COGS and generating profits. Gross profit margin is the percentage of revenue left after deducting the cost of goods sold (COGS) from total sales. It’s an important metric because it shows how much your sales go toward paying COGS and generating profits. The higher your gross profit margin, the more money you make before expenses are considered.

It helps you evaluate whether your product or service pricing strategy works well. Gross profit margin enables you to assess whether or not your product or service pricing strategy works well or needs improvement. For example, if your company has been selling its products at a loss to gain market share, then you might want to increase your prices to make up for that lost money. Or, if you find that some products bring in more profit than others, you might want to focus on those with higher gross margins.

It allows you to compare companies in similar industries. Gross Profit Margin will enable you to compare different company performances in identical industry segments and geographic regions. For example, suppose a company has a higher gross profit margin than its competitors. In that case, it can sell the same products or services at a higher price than the competition in that industry or location.

It helps investors determine whether a company has enough cash flow. t helps investors determine whether a company has enough cash flow to sustain operations over time, even during low sales periods. 

If a business has very high gross profits but also has high overhead costs — such as rent, utilities, and other expenses associated with running its operation — then it would be considered unprofitable because its total revenues would not cover all its costs.

If this same business had low overhead costs but lower gross profits, it would still be unprofitable because its total revenues wouldn’t cover all its expenses.

How to Calculate Gross Profit Margin

Gross profit is the difference between the revenue generated by your business and the cost of goods sold. The formula for calculating gross profit is:

Gross Profit = Revenue – Cost of Goods Sold

The purpose of calculating gross profit is to assess the profitability of your business. Gross profit measures what’s left over after you deduct all costs related to making your products and delivering them to customers.

Gross profit margin is a financial ratio that shows the percentage of revenue left over from sales after subtracting the cost of goods sold from total revenue.

The gross profit margin is calculated by subtracting COGS from the gross profit and dividing that number by the net sales. This equals the percentage of net sales retained as gross profit.

The formula follows:

Gross Profit Margin = (Gross Profit ÷ Total Revenue) x 100

Generally, the gross profit margin is a better indicator of profitability than the entire business. A business with total solid sales could suffer losses if high operating expenses aren’t considered. When calculating gross margin, you can determine whether you spend too much time or labor on a particular product or service.

Industry Averages for Gross Profit Margins

Industry averages can vary significantly based on the type of business, but many fall between 5% and 10%.

For example, according to industry analysts from NYU, the average gross profit margin for retailers is around 4%. For Financial Services (non-bank and insurance, it’s about 26%, while Drugs (pharmaceutical) have an average margin of about 19%.

Here is a comprehensive list of average gross and net profit margins by industry from the U.S. Margins by Sector. You can view the complete list here.

Industry	Gross Margin (%)	Net Margin (%)
Advertising	26.20	3.10
Aerospace/Defense	16.87	3.41
Air Transport	1.41	-7.66
Apparel	53.04	7.06
Auto & Truck	14.25	3.96
Auto Parts	15.58	1.34
Bank (Money Center)	100	32.6
Beverage (Alcoholic)	47.99	5.07
Brokerage & Investment Banking	69.46	20.34
Building Materials	28.32	8.40
Business & Consumer Services	31.80	4.97
Cable TV	57.39	11.24
Chemical (Basic)	20.38	11.43
Coal & Related Energy	18.54	-5.14
Computer Services	27.24	3.42
Computers/Peripherals	36.88	18.72
Construction Supplies	22.73	7.92
Drugs (Biotechnology)	62.25	-0.62
Drugs (Pharmaceutical)	67.35	11.03
Education	47.90	7.17
Electrical Equipment	33.53	7.26
Electronics (Consumer & Office)	32.41	7.08
Engineering/Construction	13.45	1.81
Entertainment	41.94	3.86
Environmental & Waste Services	33.64	6.72
Farming/Agriculture	13.61	6.03
Financial Services (Non-bank & Insurance)	85.08	32.33
Food Processing	27.00	8.44
Food Wholesalers	14.85	0.69
Furn/Home Furnishings	29.74	7.64
Green & Renewable Energy	62.92	-19.78
Healthcare Products	59.04	12.92
Healthcare Information and Technology	52.49	16.64
Hotel/Gaming	55.45	-28.56
Information Services	53.83	16.92

Other Types of Profit Margins

Operating Profit Margin

The operating profit margin is calculated by subtracting operating expenses (including selling, general and administrative expenses) and cost of goods sold (COGS) from revenues. 

Operating profit is the earnings of a business before deducting interest and taxes, depreciation, amortization, depletion, and other non-operating expenses. The operating profit is also referred to as operating income or earnings before interest and taxes (EBIT).

To calculate the operating profit margin, first, calculate your operating profit:

Operating profit = revenue – the cost of goods sold – operating expenses

Then, you can use the operating profit margin formula: 

Operating profit margin = (operating profit ÷ revenue) x 100

Operating income is a crucial metric for measuring a company’s performance. It can be used to evaluate a company’s sustainability in the long run, as well as its ability to generate cash flow. To get a more accurate picture, it’s best to use operating profit or net profit margin.

Net Profit Margin

Net profit is the money left over after you have paid all your expenses and have deducted everything that has to be removed.

All of these expenses are called operating expenses. They include salaries, rent, utilities, supplies, advertising, and other costs that directly or indirectly contribute to the company’s revenue stream, like taxes and interests.

To calculate the net profit margin, use this formula:

Net profit = revenue – the cost of goods sold – operating expenses – interest – taxes

After that, you can calculate the net profit margin using this formula:

Net profit margin = (net profit ÷ revenue) x 100

After COGS, OPEX, interest, and taxes are deducted, net profit is the amount left.

Difference Between Gross Profit, Operating, and Net Profit Margins 

Gross profit margin is the difference between revenue and cost of goods sold. It measures how efficiently a company turns its business into profits.

The operating profit margin is the difference between gross profits and operating expenses. It shows how efficiently a company conducts its day-to-day business.

Net profit margin is the difference between revenue and total costs, including all expenses, taxes, and interests. It includes all costs incurred to generate revenue.

Looking at a real-world example is a great way to illustrate the differences between the margin formulas. Here are Amazon’s margins as of March 2020:

• Gross profit margin: 26.06%
• Operating profit margin: 5.29%
• Net profit margin: 3.36%

Since each margin accounts for a little more of your company’s spending, your profits will likely decrease. As a result, your business may suffer a less dramatic drop in gross profit margins than the other margins.  

A lucrative global company like Amazon has operating expenses and costs far exceeding those of most small businesses. As a result, they can expect lower operating and net margins. 

What is a Good Profit Margin?

Across various industries, the average net profit margin in the United States is 7.71%, according to an NYU report. But that doesn’t mean your ideal profit margin will line up with this.

Generally, a margin of 5% is considered low, a margin of 10% is considered healthy, and a margin of 20% is considered high. An excellent profit margin is at least twice as high as the overall industry average. This means that if a business has a profit margin of 5%, the industry average would be around 2%. When determining whether your profit margin is good, it can be helpful to look at the numbers in this way.

In addition to helping you determine whether or not your profit margin is good, this method also allows you to compare yourself to other businesses in your industry. If you have a lower margin than most other companies in your field, there might be something wrong with your pricing strategy. 

You may need to lower your prices to be more competitive with other companies in your industry. On the other hand, if you have a higher profit margin than others in your field, there’s no need for concern — keep doing what you’re doing.

However, a one-size-fits-all approach isn’t the best way to set business profitability goals. First of all, some businesses are inherently high-margin or low-margin. Retailers and grocery stores, for instance, have low margins. Their expenses are high because they must purchase inventory, hire corporate employees and labor workers, facilitate shipping and distribution, and rent more extensive facilities as their sales grow. 

Contrary to this, businesses like consulting firms and SaaS companies usually have high gross margins. Businesses like these have fewer operating costs and, in most cases, no inventory. Jewelry stores also fall into this category. Low-margin products like food and some consumer goods tend to sell more efficiently.

Using and Improving Gross Profit Margin

When it comes to a business, the profit margin is significant. It measures how much money your business makes per unit of product sold.

The profit margin can be calculated by dividing the net income by the sales revenue. With a high-profit margin, you can make more money with each sale.

You can improve your profit margin in several ways:

Reduce your overall operating costs: You can lower costs by buying materials at discounted rates, getting better service deals, and using less expensive shipping methods.

Increase prices: Raising your fees may be the easiest way to increase your profit margin. However, this can be risky because some customers will not pay higher costs for their goods or services if they are not worth it. For example, if you raise your prices but don’t improve the quality of your product, then customers may decide not to buy from you anymore and go elsewhere instead.

Increase sales volume: The best way to increase profits is by increasing sales (that is, making more sales). However, this isn’t always easy because many factors affect sales volumes, such as economic conditions and market competition.

Cut underperforming products or services: If you offer several different products or services, ask yourself if they all provide value for money. If one product generates sales but doesn’t contribute much profit, consider dropping it from your range until things pick up again.

Add higher-margin products or services:  If your products or services have a high markup, you’ll make more money on each sale. You can increase prices or choose more expensive products than their competitors’ offerings.

Adjust your pricing strategy: If you sell products, you can adjust your prices to increase the profit margin. For example, if you’re selling a product with a cost price of $10 and a retail price of $20, you can reduce the price to $5 and increase the retail price to $25. That way, you make more money per sale. If you’re unsure what price point will work best for your customers, talk with your accountant or another financial professional who can help you through this process.

Get better deals on supplies and materials:  When it comes to increasing profits, every little bit helps. That’s why it’s essential to look for ways to get better deals on supplies and materials needed for your business operations. You might be able to negotiate better terms with suppliers or find lower-cost alternatives that will still meet your needs just as well as name-brand goods.
Build brand loyalty: A customer who’s loyal to your brand will buy more of your products and won’t go elsewhere when they need other things. This means you’ll have less competition and less risk of losing customers to competitors. Loyal customers also make fewer returns, which can help reduce costs associated with refunds or exchanges. You may also see increased sales because customers like your brand tend to refer others to you.

Financial analysis is an integral part of any business activity. It helps managers understand their companies’ performance, identify areas for improvement and make better-informed decisions. 

The purpose of financial analysis is to examine past performance, forecast future performance, determine where improvements can be made, and help business owners make informed decisions about their companies’ finances.

This guide covers financial planning and analysis to help propel your career or move your current business forward.

What Is Financial Planning & Analysis?

Financial Planning and Analysis (FP&A) is the process of identifying, planning, and analyzing the financial aspects of a business. Financial planning helps organizations make intelligent business decisions by providing insight into how they perform financially. This can include assisting leaders in understanding how to improve their company’s performance or deciding whether to buy or sell assets.

FP&A professionals use their financial knowledge to improve an organization’s financial performance. They work with other departments such as sales, marketing, and operations to provide businesses with accurate and timely information on their financial performance. 

They are essential in managing company cash flow by forecasting future revenues and expenses, determining budgeting needs, performing economic analyses, and benchmarking against competitors. They are often responsible for preparing budgets and forecasts and monitoring actual results. They also provide information on the performance of different business units and new investments based on past performance.

FP&A professionals may be involved in several different areas, including:

Budgeting: Producing detailed forecasts of future revenues and expenses to plan how much money will be available for spending each year. Budgeting includes long-term planning based on historical trends and short-term predictions based on current conditions.

Cash flow forecasting: Producing forecasts for cash inflows and outflows. These forecasts analyze whether a company’s current assets will be sufficient to meet its liabilities when they come due.

Capital analysis: Determining whether a proposed investment makes sense from a financial perspective. This analysis might include comparing returns from proposed investments with those from alternative assets, such as bonds or other securities offered by companies with similar risk profiles.

What Is the Difference Between FP&A and Accounting?

FP&A and accounting are two different functions within an organization. 

Accounting professionals are responsible for preparing financial statements, including balance sheets and income statements, and complying with government regulations related to taxes, auditing, payroll, etc. They also generate reports based on the information gathered from various systems within the company.

FP&A uses accounting information but goes beyond it by looking at how the data and trends affect future performance and how changes in prices, costs, or investments will affect the business over time. The FP&A team analyzes the data, generates reports, and makes recommendations to senior management based on their findings.

The role of FP&A is to provide insights into how changes in business processes or strategies will impact future performance. This allows management to make better-informed decisions about strategy and resource allocation.

In addition, FP&A professionals typically have backgrounds in finance or accounting but also possess strong analytics skills because much of their work involves analyzing data. Some companies even hire people with backgrounds in industrial engineering or information technology.

What Is the Structure of an FP&A Team?

Financial planning and analysis (FP&A) teams comprise people from various backgrounds and skill sets. This diversity is essential because it affords the team members a more comprehensive view of the business. Many companies have FP&A teams divided into several different areas, each with its responsibilities.

Although FP&A teams can vary in size and structure from company to company, there are some common elements that most FP&A teams have.

The company’s chief financial officer (CFO) is the senior executive directing a company’s financial actions and initiatives. Team leads report to the CFO directly or through a VP of finance or COO, depending on the company’s organizational structure. 

Below those leaders are individual contributors who work in specialized roles such as analysis, forecasting, auditing, and forecasting. These people take information from various sources to build reports for decision-makers within their functional area.

Accounting

The accounting department is usually the most significant part of an FP&A team. Accountants are responsible for ensuring that all financial data is recorded correctly by generally accepted accounting principles (GAAP).

They also prepare reports used by management to make critical business decisions such as budgeting or determining whether or not to pursue a course of action. This also includes internal auditors who monitor finance departments for compliance with accounting standards.

The accounting department has several different roles and functions, including:

• Accounts payable: The department that handles invoices and payments.
• Accounts receivable: The department that collects money from customers.
• Audit: The department that checks the company’s books to ensure they’re accurate.
• Controller: A high-ranking executive who oversees accounting functions in a company. Controllers typically manage many different departments, such as accounting and finance.

Treasury and capital market

This is where you’ll find professionals focusing on investments, cash flow, and capital markets. This team oversees the company’s cash flows, including short-term debt funding, long-term financing, and capital investments.

It also manages the company’s relationship with its investment banks and compliance with regulatory requirements.

FP&A

The FP&A team is the hub that drives the financial performance of an organization. The team is responsible for collecting, analyzing, and reporting financial data to ensure all stakeholders have the necessary information to make intelligent financial decisions for the company.

FP&A teams typically consist of a chief financial officer (CFO), controllers, and analysts. In larger companies, FP&A teams may also include other finance professionals involved in planning, budgeting, or forecasting.

The team’s responsibilities may include:

• Developing the annual budget
• Planning and tracking projects
• Analyzing revenue and expenses
• Managing financial risk
• Identifying opportunities for investments
• Supporting other departments with their day-to-day needs

FP&A also has a strategic role in helping companies make decisions that affect their long-term financial health. These decisions may include pricing strategies or investments in new products or services.

What Does a Financial Planning and Analysis Team Do?

 A financial planning and analysis (FP&A) team are responsible for helping businesses make decisions about a company’s financial health. This can be done through forecasting, reporting, budgeting and forecasting, expense management, and other tasks.

The team gathers financial information from various sources, analyzes it, and presents the findings to management.

FP&A teams are typically found in companies with many employees and multiple departments or divisions. The team’s efforts can help ensure that each department works toward the goals and objectives. In some companies, the FPA team reports directly to senior management or the board of directors.

Accounting is often focused on looking backward, whereas FP&A is focused on the company’s future. They do this by leveraging financial management software, especially tools for budgeting, scenario planning, forecasting, and corporate performance management. 

That said, most of their obligations fall into one of three categories:

• Financial planning
• Decision support
• Specialized support

Financial Planning

The financial planning and analysis team is responsible for managing the budget and analyzing the financial statements. 

Financial planners develop budgets and forecasts, which help managers decide how much to spend on different business areas. They may also evaluate capital investments and make recommendations regarding these expenditures. 

Financial analysts review financial statements to ensure that they are accurate. These professionals analyze trends in sales, costs, assets, and other factors to identify problems before they become serious. They also compare actual results with budgets and plans to determine whether the company is performing as expected or if any issues need to be addressed.

To pursue these ends, the FP&A team must constantly run through three critical financial statements:

• P&L (income statement)
• Balance sheet
• Cash flow statement

These three documents help the team account for key financials like gross profit and net income margin, the cash balance on hand, monthly cash burn, and various ratios.

Decision-Making Support

FP&A teams don’t just focus on forecasting and planning. Financial planning and analysis teams are also responsible for helping companies make decisions about their future. The team’s primary goal is to help businesses grow by analyzing data and forecasting financial results.

One of the main questions they must ask is, “Is the company’s current assets and investments delivering ROI, or is there a better way to utilize cash flow?” To help solve these issues, they may seek to identify areas to invest in or generate cash flow while also analyzing the cost-efficiency of each department.  

Depending on the company, many FP&A teams are in charge of creating a monthly “CFO book,” which provides key metrics, including:

• Current forecasts, listing both the risks and the opportunities within the current plan
• Historical financial analysis 
• Key performance indicators (KPIs)

This book can empower upper management or the CFO, helping them identify opportunities for investment and optimization.  

Specialized Support

Depending on the business, an FP&A team may be pulled into various other roles for which they have specialized expertise. 

Businesses need accurate data to make intelligent decisions about their operations. This data can come from numerous sources, including sales reports, inventory databases, and customer information.

However, it takes someone with specialized training to gather all this information and turn it into valuable numbers that management can use.

The FP&A team gathers data from every department within the company, including finance, accounting, and marketing. They also use independent research firms for outside sources of information such as industry trends or economic forecasts.

The result is a complete picture of how well your business is performing financially and what areas need improvement. This information gives you an edge over competitors who may not have access to this type of data or don’t know how to analyze it correctly.

FP&A Teams’ Three Primary Statements

The primary responsibility of FP&A teams is to provide insight into what happened in the past and what is happening now so that executives can make informed decisions about the future. To do this, FP&A teams use three main statements:

• Profit and Loss (P&L) Statement
• Balance Sheet
• Cash Flow Statement  

On their own, each serves a unique purpose, but together, they make it possible for FP&A teams to perform financial modeling and forecasting.  

Profit & Loss Statement

Also known as an income statement, the profit and loss statement measures the business’s profitability over time. It has two major parts: income and expenses. These components allow the FP&A team to calculate how much money was gained or lost in the intervening time. 

This is the most popular financial statement because it shows whether a company made or lost money during a specific period, like a month or year. The profit and loss statement shows you what happened to your money over a period (typically a year). In contrast, the Balance Sheet is concerned only with where your money is at any given moment.

One of its purposes is to help investors gauge how well a company is performing by comparing expenses against revenue. If a company has more expenses than revenue, it loses money; if it has more income than expenses, it makes money.

By analyzing a P&L statement, an FP&A team can better gauge the company’s overall financial health.

Key Features of the Profit and Loss Statement

The profit and loss statement is a document that summarizes the revenues and expenses of an organization over a given period. You’ll find three key features on it: revenue, fees, and net income. These three features show how well your company is financially doing over a given period.

Items Included in the profit and loss statement include:

Revenue: The total income of a company refers to the total amount of money brought into the company. It represents all sales generated in a given period, such as one quarter or one year. Revenue includes all money a company receives from its customers, whether it’s cash, checks, or other forms of payment. 

Expenses: Expenses are the costs incurred while generating revenue. Expenses can be broken down into four main categories:

Cost of Goods Sold (COGS): After subtracting its direct costs such as materials, labor, and shipping, this is the profit a company makes.

Operating Expenses: This covers payroll, rent, utilities, and other things that aren’t directly related to production or sales. These are generally fixed costs that are relatively consistent from month to month.

Balance Sheet

The balance sheet is a snapshot of a company’s financial position at any given moment — it reports what a company owns (its assets), what it owes (its liabilities), and its net worth (assets minus liabilities). The balance sheet is also sometimes called the statement of financial Position.

This statement tells you how much money the company has on hand and how its financial situation compares to when it was last examined.

The balance sheet is the heart of a company’s financial statements because it tells you if it is in good shape or in danger of bankruptcy.

Key Features of the Balance Sheet

When looking at a balance sheet, you will see three key features: assets, liabilities, and equity. These three sections contain information about your company’s financial position on a given day. 

Items Included in the Balance Sheet include:

Assets: The sheet’s asset side shows various things that belong to your organization. Assets are grouped into current assets and noncurrent assets. Existing assets are resources that can be converted to cash within one year, such as cash on hand, accounts receivable (i.e., money owed by customers), inventory, and prepaid expenses (e.g., insurance). 

Noncurrent assets are resources with values lasting beyond one year and include long-term investments, fixed assets (e.g., machinery), intangible assets, and deferred charges.

Liabilities: Liabilities are the debts and obligations of a business, such as loans, accounts payable, and accrued expenses. Liabilities can be short-term or long-term.

Current liabilities are debts that must be paid within one year. Examples of current liabilities include accounts payable, interest payable, income tax payable, and short-term loans.

Long-term liabilities are debts that mature more than one year in the future. Long-term liabilities include bonds payable, mortgages payable, and long-term notes payable.

Equity: Shareholders’ equity is the net difference between assets and liabilities. After accounting for everything owed, the equity section sums up assets minus liabilities and shows what you own. Equity can be damaging if liabilities exceed assets, called a deficit.

Cash Flow Statement 

The cash flow statement looks at how cash moved during a particular period — usually over one year. It shows cash changes from operating, investing, and financing activities. It offers an overview of how well a company generates money to fund its operations, pay its debt, and support its investments.

For investors, the statement of cash flows can be significant, as it shows how much actual cash moved in and out of the company during the reporting period.

The information is intended to give investors and other stakeholders an idea of how well a company is using its money, and it’s also a good way for companies to stay accountable to their shareholders.

Key Features of the Cash Flow Statement

The statement of cash flows groups cash-related activities under three main sections: operating, investment, and financing. These sections tell you the overall state of your company’s cash flow. 

Empower Your FP&A Team

 Your FP&A team is the backbone of your finance organization. They’re responsible for collecting and analyzing data to help you make sound business decisions.

As the leader of your company, it’s up to you to empower your FP&A team with the tools they need to succeed. That includes educating them on your strategy, empowering them with the right tools and technology, providing them with access to data, and building trust among all team members.

If your business just started or is still getting off the ground, you might wonder what the best credit cards are. As a startup, you probably don’t have much revenue coming in, and you want to spend as little as possible. 

Choosing a business credit card for your startup comes down to four factors—ease of use, signup bonuses, rewards, and the credit limit. The best business credit cards for startups will help you build your business and credit and easily manage cash flow while providing valuable rewards that can be spent on office supplies, travel, and more. 

This guide will explain each of them in detail so you can make an informed decision when it comes to choosing a new credit card.

What Are the Best Credit Cards for Startups?

If you’re a startup business, getting the right credit card can be a great way to build your business credit, earn rewards, and ensure your business is ready to grow. But with so many different types of cards available, it can be hard to pick the best one for your needs.

For example, some cards offer cashback or airline miles, while others provide travel-related perks like free concierge services or rental car insurance. It’s essential to choose a card that will give you the most benefit for your business.

Startups are not like small businesses, and their credit card needs differ from traditional small businesses. At the moment, our top two recommendations are Ramp and Brex. They offer some of the best spending limits for business credit cards, and they both lack a personal guarantee which we will discuss later.

The Best Card for Startups – Q2 2022

Q2 2022 is here, and with it, a new set of credit cards. If you’re a startup or even an established business, it’s essential to have a credit card to help your business prosper. There are a lot of different cards out there, and each one has its unique perks and rewards. 

One of the most popular options is the Brex Credit Card. This card offers some fantastic benefits and can be used by anyone looking to expand their business or personal finances. The Brex card provides several benefits for businesses, including no annual fee, no foreign transaction fees, and a signup bonus of $750.

Brex also offers tools to help you manage your spending through its app and website, including notifications when payments are due, alerts when someone else has used your card (so you can monitor who has access to it), fraud protection services, and even business trip tracking tools so you can keep track of where you spent money while traveling for work purposes.

We also recommend the Ramp Business Credit Card. This is an excellent choice for those who want to build their credit history and establish their business as a legitimate entity. If you’re starting or have some money but don’t have much of a track record yet, RAMP is an excellent option for getting started with business credit cards. This card has no annual fee and lets you earn points that can be redeemed for cash back or airline flights. They also offer a $750 signup bonus when you sign up with them for the first time.

Why Startups Need a Specialized Credit Card

A startup needs a credit card because it doesn’t have any money — or at least not enough money to cover all its expenses. Most startups spend more money than they make because they’re trying to scale their companies quickly.

The main reason to get a specialized credit card for your startup is to improve your cash flow. Credit cards allow you to buy now and pay later, which can be helpful when you need to make a big purchase or cover an unexpected expense. This can especially be helpful in the early stages of building your business because it gives you time to generate additional revenue before paying off the card balance.

Another reason to get a credit card for your startup is to build a credit history for yourself or your business. Having good credit can be critical when applying for loans, mortgages, and other types of financing down the road — so having even one or two years of good payment history will help give you an edge over other applicants who don’t have any credit history. At all!

Finally, using a specialized small business credit card can also help improve your company’s reputation by showing that you take financial responsibility seriously and are willing to invest in yourself and others. 

How Do You Choose a Better Credit Card for Your Funded Startup?

Your credit history and score are often not yet on the radar when you are starting a business. But as soon as you start accepting payments from customers, your finances can become an essential factor in the success of your business.

One of the most important things you’ll need to choose is a credit card for your funded startup — but what should you look for?

The first thing to consider is how much you plan to spend each month. If you’re planning on making larger purchases or paying off smaller purchases over time, you’ll want a card that rewards both types of spending.

If you’re planning on making large purchases soon, then a card with an annual fee might be worthwhile because it gives you extra rewards points just for signing up.

On the other hand, if you’re planning to spend less than $1,000 per month, there’s no point in paying an annual fee or getting locked into a longer-term contract.

Next, consider how often you plan to use your card and how much flexibility it offers regarding interest rates and balance transfers. The interest rate on your credit card matters because it determines how much money you will pay in interest over time. The lower the interest rate, the less you’ll pay interest charges if you carry a balance on your card each month.

Features to Look For in a Credit Card for Your Startup

Startup Focused Rewards

If you’re starting with credit cards, it’s essential to find one that has rewards that you’ll use. This could be cashback, travel points, or airline miles — whatever fits your lifestyle.

You’ll have to decide how much flexibility you want in your rewards program. Some cards offer different rewards depending on how much you spend each month, while others don’t give priority based on how much money you spend with them.

The good news is that most credit card companies reward spending in general, so there is usually no need to worry about this aspect of your credit card.

A Spending Limit Based on the Company’s Balance Sheet

When you apply for a credit card, the bank or credit card provider will look at your balance sheet to determine whether you are a reasonable risk.

They want to know if you have your business has assets (or if you are personally qualifying that you have a home, car, etc.) and if your revenue is sufficient to repay the debt. If there is no collateral or payment, they will probably ask for a personal guarantee.

The banks don’t want to give out credit cards with unlimited spending limits because they would be on the hook for any losses if you defaulted on the payments. So, if you have a large credit card limit, it’s probably because you can provide some form of security or collateral against losses.

No Personal Guarantee 

If you’ve ever had a credit card with a high limit, you may have been asked to put up a personal guarantee — essentially promising that if you don’t pay off the debt, the bank will come after your personal assets. This is not ideal because it can affect your ability to get another loan or open new lines of credit in the future.

A personal guarantee means you’re responsible for paying back the debt if your business fails. A small business credit card without a unique warranty is best to ensure that you aren’t liable for any outstanding debt if your company goes under or declares bankruptcy.

Easy and Fast Bookkeeping

One of the most significant benefits of using a credit card is that it can make your life easier for bookkeeping. You don’t have to worry about writing checks or keeping track of receipts because everything is automatically recorded on your statement each month.

If you’re concerned about keeping up with your finances and balancing your checkbook, a credit card with easy bookkeeping can make a difference.

Look for cards with free tools that allow you to track your spending and keep tabs on your credit score — so you don’t have to pay an expensive monthly fee for those services elsewhere.

Spending Management Tools

If you want help keeping track of your spending, a rewards card with budgeting tools can be significant. Some cards will help you track your spending by providing monthly statements showing how much money you’ve spent on other purchases (such as dining out or travel). Others allow you to set spending limits so that if you try to go over your budgeted amount, they’ll alert you before you spend too much.

Here are a few things to keep in mind when choosing a card for your startup:

Rewards programs

Credit card companies offer amazing rewards programs that can help you save money on everything from gas and groceries to traveling and entertainment.

While plenty of cards offer cashback or miles on all purchases, some cards offer higher rewards rates for specific spending categories. This can be especially useful if you know where your business will spend most of its money and want to earn more points faster.

You’ll want a rewards program that makes sense for your company. Some businesses prefer cashback, while others prefer travel rewards. If you’re looking for cash back, consider what percent you’d like to earn and how often you’d like to receive the money. While most rewards programs offer 1% cashback, some can go as high as 5%.

If you’re interested in travel rewards, consider which airline or hotel network is suitable for your business’s needs and how often you’ll spend money on these purchases.

Credit limit

 A credit card’s credit limit is the maximum amount you can spend on your card.

It’s essential to have a credit limit in line with your spending habits and financial goals. For example, if you want to build up your credit score, it makes sense to only charge what you can afford to pay back each month.

If your credit limit is too high, you may be tempted to charge more than you can afford.

Credit limits are typically set by individual creditors, who use information about your business revenue, expenses, and other details to decide how much they will lend you. When you apply for a new account, the creditor also looks at how much debt you’re currently carrying on other accounts — including other cards from the same issuer — and how this relates to your business assets and profitability.

Fees

Credit cards can be a great way to build your credit and earn rewards on everyday purchases. But they aren’t all created equal. Before you apply for a new credit card, check the card’s terms and conditions, including any annual fees, interest rates, and other charges. Here are some of the most common costs that you might encounter:

Annual fees. Most credit cards charge a yearly fee, but it’s typically only set once a year — either at the beginning or end of your first year as a cardholder. Annual costs vary by card and issuer, but they generally range from $50 to $500 per year. You may be able to avoid paying an annual fee if you have good credit or if you open an account with a large bank or issuer like Capital One, which offers different cards with no annual fee at all.

Late payment fees. If you pay your bill late — even by one day — you could face steep penalties in addition to interest charges on any unpaid balance: A late fee is standard for many cards that charge interest on purchases as well as cash advances (though some issuers waive this fee if you’re still paying off your balance gradually).  

How Do Brex, Amex, and SVB Startup Credit Cards Compare?

	Brex	Silicon Valley Bank	American Express	Chase	Ramp
Built for Funded Startups	Yes	Yes	No	No	Yes
Rating for Startups	4/5	3/5	3/5	3/5	4/5
Spending Limit	Fairly Good	Good	Fair	Fair	Fairly Good
Rewards / Cash Back	Startup Focused	Startup Focused	Personal Travel Rewards	Personal Travel Rewards	1.5% cash back
Personal Guarantee	No	No	Yes	Yes	No
Easy Bookkeeping	Yes	Yes	Yes	Yes	Yes
QuickBooks Online Sync	Yes	Yes	Yes	Yes	Yes
Annual Fee	$0	$0	$295	$95	$0
Instant Signup	Yes	No	No	No	Yes
Ability to Carry Balance	No	No	Yes	Yes	No
Control Team Spending	Yes	No	No	No	Yes
Reimbursements Feature	No	No	No	No	Yes
Business Checking Account	Yes	Yes	Yes	Yes	No
Sign Up Bonus	$750	None	None	None	$750

Brex

Brex is a startup that provides business credit cards to startups. The Brex card offers several benefits for businesses, including no annual fee, no foreign transaction fees, and a generous signup bonus of $750.

You get 10,000 points when you spend your first $1,000 on your Brex Card, another 10,000 when you spend $3,000 in 3 months on your Card, and 20,000 more when you link payroll to your Brex account.

The Card also offers a 0% introductory APR on purchases for 12 months, with no balance transfer fee or interest rate increase after the intro period ends. 

The primary benefit of the Brex Card is its easy application process: There’s no minimum credit score requirement or collateral needed to get approved for an account — just some basic information about your business and its revenue.

Even if your credit score is as low as 300, you can still qualify for this Card. The downside is you’ll need a minimum of $50,000 in the bank to be eligible for monthly repayments, maybe more. 

Brex also offers tools to help you manage your spending through its app and website, including notifications when payments are due, alerts when someone else has used your Card (so you can monitor who has access to it), fraud protection services, and even business trip tracking tools so you can keep track of where you spent money while traveling for work purposes.

The Card also offers free FICO score access.

American Express (Amex) Blue Business Cash

If you’re looking to get a business credit card for your startup, the American Express Blue Business Cash card is another great option. The Card has no annual fee and offers 2% cashback on all eligible purchases of up to $50,000 per calendar year, then 1% cash back earned is automatically credited to your statement.

The American Express (Amex) Blue Business Cash Card has a 0.0% intro APR on purchases for 12 months from the date of account opening; then, after that, it has a variable rate of 13.99% to 21.99%, based on your creditworthiness and other factors as determined at the time of account opening.

The best part about this card is that it’s available to businesses with as little as $5,000 in gross revenue per year. That makes it a good choice if your startup isn’t yet making much money — or if you want to keep things simple.

This card has no annual fee and comes with other perks, such as price protection and extended warranties on items purchased with the Card. The American Express Blue Business Cash card is a simple card with no annual fee and no rewards. It’s designed for small businesses that need to keep their costs down and don’t want to get into the details of complicated reward programs.

American Express (Amex) Business Gold

Amex has a great business card for startups called the American Express Business Gold Card. This Card offers a generous welcome offer of 70,000 Membership Reward points after spending $10,000 on eligible purchases with the Amex Business Gold Card within the first three months of card membership.  

This Card can offer some fantastic rewards. The AmEx Business Gold Card offers some great tips for startups that spend heavily on travel and dining out categories, typical expenses for businesses in those industries.

You earn 4 Membership Rewards points per dollar when you use an airline, purchase at gas stations, and more. The 4X rewards apply to the first $150,000 in combined spending per year from some of their categories, and after that, spending earns 1 point per dollar.

The American Express (Amex) Business Gold Card has a $295 annual fee.

As a startup, you should consider applying for this card if your business has a good credit score. American Express can be tricky because it requires excellent credit to get approved — but once you’re approved, it can be a fantastic addition to your wallet.

You’re looking at a credit score of about 690-850 to qualify for this Card.

Cardholders also get access to over 1,000 airport lounges worldwide through Priority Pass Select membership and access to Global Shop Direct, which allows you to shop online at more than 350 international retailers.

American Express (Amex) Business Platinum

The Amex Business Platinum is an excellent card for startups because it offers a large signup bonus, a generous rewards program, and special perks for travel.

The Card has an annual fee of $695, but the rewards program can make up for that in just a few months. For example, you get 5X Membership Rewards points on flights and prepaid hotels on amextravel.com and 1X points for each dollar you spend on eligible purchases.

The Card has an introductory offer of 120,000 Membership Rewards points after spending $15,000 on eligible purchases with your Card within the first three months of Card Membership.

The Amex Business Platinum card has no foreign transaction fees, which can save you money when traveling internationally. It also comes with complimentary airport lounge access (with the correct membership level), which can help you relax before or after a flight without paying exorbitant airport lounge fees. 

This provides access to over 1,000 airport lounges worldwide — another perk for business travelers who want to get work done while traveling by plane or train. The American Express Global Lounge Collection can provide an escape at the airport. With more than 1,400 airport lounges across 140 countries and counting.

The Card’s biggest perk is its rewards rate — 5 points per dollar spent on airfare, hotels, and car rentals; 2 points per dollar spent on all other purchases; and 1 point per dollar spent on everything else.

You can redeem points for statement credits or use them to book flights through Amex Travel online or by phone, which could be an easier way to earn airline miles if you’re not flying very often.

Silicon Vally Bank Startup Card

Silicon Valley Bank is one of the most respected financial institutions in the Silicon Valley region. The bank caters to venture-backed and high-growth companies, offering a card for startups.

This Card is not just a credit card but also a business checking account that comes with a free MasterCard. It has no annual fee, and there are no foreign transaction fees.

The Card has an introductory APR of 0% for 12 months on balance transfers made within the first 60 days of opening an account. There’s also an introductory APR of 0% on purchases for 12 months, after which the rate will be 11.24% – 23.88% variable based on your creditworthiness.

If you use this card responsibly, it could make sense to get it because it has some nice perks like travel protection insurance (up to $250,000 in accidental death and dismemberment insurance when traveling), purchase protection insurance (up to 120 days against loss or theft of items purchased with your Card), auto rental insurance (covers collision damage & theft of rental cars up to $100,000) and extended warranty protection.

The Card has no annual fee, but you’ll need to be approved for an account before applying for the Card. This means you’ll need to have a business relationship with Silicon Valley Bank first — even if it’s just a small one.

Ramp

It can be tough to get a business credit card if you’re a startup. Many banks will not issue cards to companies that have been in business for less than 12 months.

That’s where RAMP comes in. The company is an alternative financing company that helps startups get approved for a small-business credit card. There are no fees, and you can get approved even if your company has only been around for a few months.

The cards come with zero percent introductory APRs on purchases and balance transfers. Still, they also have high-interest rates after that term expires — up to 19% APR depending on your outstanding balance.

If you’re just starting or have some money but don’t have much of a track record yet, RAMP is an excellent option for getting started with business credit cards.

This card has no annual fee and lets you earn points that can be redeemed for cash back or airline flights. You also get exclusive discounts on travel expenses such as baggage fees and airport parking. 

Divvy

If your startup is starting and has little in the way of assets or income, it can be tough to get approved for a card in the first place. That’s where a startup-friendly credit card like Divvy comes in. The Card offers perks for small businesses and startups that other business credit cards don’t — including a cash back bonus, no annual fee, and foreign transaction fees.

The Divvy card isn’t your typical rewards card either. Instead of giving you points or miles that you can use for travel or gift cards, the Divvy gives you cashback on every purchase. And there are no limits on what you can earn or when you can redeem your earnings.

As a bonus, Divvy also gives you access to multiple lines of credit without needing to go through a traditional bank (and applying through one at a time). That means if you want to use multiple lines of credit at once — which can help boost your scores — Divvy will let you do that without any issues.

The Divvy Business Card is a solid choice for startups that want to earn rewards on every purchase. It has no annual fee, and it offers 2% cashback on all purchases, which can be redeemed as a statement credit or applied toward your monthly payment. You’ll also get 10% back in additional rewards by saving through the Divvy Spending Portal.

The Card doesn’t have an introductory 0% APR offer or any other perks, but its low ongoing APR of 14.74% – 19.74%, depending on your creditworthiness, makes up for that shortcoming.

Chase Ink Business Preferred

The Chase Ink Business Preferred card is an excellent option for startups and one of the best credit cards you can find. It offers 100K bonus points after spending $15,000 on purchases in the first three months from account opening. $1,000 cash back or $1,250 toward travel when redeemed through Chase Ultimate Rewards.

The Card has no foreign transaction fees and gives you access to the Chase Ultimate Rewards travel portal, where you can get additional discounts on airfare, hotels, and more. You also get 3 points per $1 on the first $150,000 spent on travel and select business categories for each account.

The Chase Ink Business Preferred card is an excellent choice for small business owners who want to earn rewards on their spending and access the Chase Ultimate Rewards program. The Card has a $95 annual fee, but it can more than pay for itself with its high rewards rate.

With Fraud Protection, your card transactions will be monitored for possible signs of fraudulent activity using real-time fraud monitoring. And with their Zero Liability, you won’t be held responsible for unauthorized charges made with your card or account information.

Chase Ink Business Unlimited

Chase Ink Business Unlimited is one of the best business credit cards for startups. It offers a generous rewards program and no annual fee.

The Chase Ink Business Unlimited is our runner up for startups because it gives you a great rewards rate on travel and dining and no annual fee to pay.

The Card offers a $750 bonus cash back after spending $7,500 on purchases from account opening in the first three months. You’ll also earn unlimited 1.5% cash back on every purchase made for your business.

The Chase Ink Business Unlimited is a great card for small businesses that aren’t sure how much they’ll spend each month. The Card has no annual fee and offers an introductory APR of 0% on purchases and balance transfers for the first year. After that, you’ll pay a variable APR of 16.49% to 22.49%.

There are no foreign transaction fees, and you can earn 3X points per dollar spent at U.S. stores. You also get 2X points per dollar spent on travel and shipping costs, social media advertising, and search engine advertising from Google, Bing, or Yahoo.

Our Top Pick for the Best Startup Credit Card

At the moment, our top two recommendations are Ramp and Brex. They offer some of the best spending limits for business credit cards.

There are many different types of startup credit cards, but only a few are designed specifically for startups. When you’re starting up your business, it’s easy to get confused by all the different cards available and not know which one is right for your needs.

To help make things easier, we’ve put together this list of our top picks for the best startup credit cards for startups in 2022.

It’s not uncommon for small business owners to use “controller” and “CFO” interchangeably. But while they have similar roles, they’re quite different.

A CFO is responsible for all financial aspects of the company. This can include setting the company’s overall long-term financial goals, overseeing various departments within the company, preparing budgets and financial reports, and more.

In comparison, a controller is responsible for all accounting transactions within a company. This can include payroll, accounts payable, accounts receivable, bank reconciliations, etc. 

Controllers need to have a strong understanding of accounting to make sense of financials for the company. CFOs are usually upper management that oversees other members of the finance department.

This article aims to clear up some of the confusion between these two jobs and outline the differences in their roles, responsibilities, reporting structures, and more.

What Is a Controller?

A controller is a company’s chief accounting officer and often serves as the head of the accounting department. A controller manages the accounting department and supervises people like accountants, tax managers, and payroll managers. A controller usually reports to the chief financial officer (CFO), and the CFO distributes the financial management responsibilities to the controller.

In smaller companies, it may be the case that the controller is the only accountant available to report directly to the CEO. There may also be an accounting clerk to help assist with some accounting.

Controllers are also responsible for setting budgets and managing cash flow, as well as the preparation of financial statements. They also monitor accounts receivable and payable, revenue, payroll, and inventory records to ensure accuracy. They may also supervise a staff of accountants or bookkeepers who handle day-to-day accounting activities, such as journal entries, payroll processing, or billing invoices.

To become a controller, you will need a bachelor’s degree in accounting, finance, or business administration and several years of experience in management roles in an accounting department. Certification can also be taken for better pay and more work opportunities, such as the Certified Public Accountant or Certified Management Accountant designation.

Other financial controller duties may include:

• Implementing policies and procedures
• Creating budgets
• Approving invoices
• Preparing financial statements
• Managing strategic planning
• Handling risk management
• Planning and handling risk management
• Safeguarding company assets
• Processing payrolls
• Reviewing financial statements
• Working with CPAs on audits and tax returns

What Is a CFO?

CFO stands for Chief Financial Officer and is essentially a financial manager in charge of the company’s entire accounting department. Its role is to oversee and improve its operations and economic activities.

If a company has a controller or an accounting manager, that person reports to the CFO (although these roles might be combined). In larger companies, there can be more than one CFO. For example, there might be a CFO for each subsidiary or division within the company.

CFOs spend most of their time applying revenue strategies, assessing financial opportunities and risks, and keeping an eye on cash flow – both day-to-day and in the long term. The CFO role also requires an understanding of business strategies, risk management, and financial analysis. Because of this, finance officers often have extensive experience working as accountants or in other positions within the finance department before being promoted to CFO.

CFOs must have strong leadership skills to manage a team, execute tasks, and set goals for specific projects. They must also demonstrate excellent communication skills to report critical information to upper management and shareholders.

Other CFO duties may include:

• Overseeing the company’s finance team, including accountants, controllers, auditors, etc
• Planning with project managers on ways to increase revenue
• Supporting the sales and marketing team
• Raising capital from investors
• Mergers and acquisitions
• Managing the cash flow of the company
• Long term strategic planning for the company

What Are the Main Differences Between a Controller and a CFO?

Although controllers and CFOs manage finances within a company, their responsibilities can be quite different. The finance department is an essential part of a company’s functionality.

They organize the most critical aspects of business, such as accounting, tracking sales and expenditures, and managing payroll. Within this department, two key roles are controller and CFO (Chief Financial Officer). 

The primary role of a controller is to oversee the accounting department’s daily activities and make sure that established financial goals are met. This includes creating budgets, approving invoices, working on audits and tax returns, processing payrolls, etc. A controller also ensures sufficient cash flow to fund operational needs. This person will also be responsible for drafting financial reports to present to upper management or board members.

The role of a CFO varies depending on the company’s size and industry. Typically, their duties include:

• Analyzing data about the company’s finances.
• Creating financial plans for the future.
• Improving efficiency.

Managing internal controls and risk assessment is another critical function of a CFO, supervising financial staff members and preparing reports for investor relations purposes.

Here are four more critical differences between a controller and a CFO:

Accounting vs. Finance: Controllers are usually experts in accounting and are well-versed with GAAP and tax rules. In most cases, they hold a CPA title or similar professional titles. CFOs, on the other hand, have a broader understanding of finance, investing, and the capital markets. They don’t necessarily need to be CPAs or have a solid grasp of accounting practices. CFOs usually have strong backgrounds in investment banking and management positions. 

Internal controls vs. External controls: Controllers are also responsible for monitoring the company’s internal controls and helping protect its assets of the company. As such, they focus more on the internal processes and workflow of the company. In contrast, CFOs spend more time looking externally for investment opportunities, partnerships, and acquisitions that will help grow the company for the future. 

The face of accounting vs. face of the company: Controllers usually oversee and work with the company’s accounting department and, as such, are seen as the face of accounting. The CFO is the face of the company financially to outside parties. They handle all the acquisitions, partnerships, and networking with banks and other financial brands.

When a Company Might Need a Controller

As a company grows, so do its financial needs. When enough growth occurs, someone must be hired to handle the company’s finances. This person is usually called a controller. 

A controller is essentially a chief financial officer for smaller businesses. In some cases, controllers are also called accounting managers or accounting directors.

Controllers oversee all day-to-day accounting operations and procedures in smaller companies that do not have enough revenue or business transactions to warrant hiring a CFO.

A controller’s responsibilities include, but are not limited to:

Supervisions of Bookkeeper or Staff Accountants

The controller is responsible for overseeing the work of lower-level accounting employees. In a smaller company, the controller may be responsible for supervising only one person, whereas, in a larger company, they may supervise multiple accountants and bookkeepers.

Accuracy of Financial Reports

The controller is responsible for the accuracy of the company’s financial statements (income statement, statement of retained earnings, and balance sheet) and maintaining internal controls to keep the business’s financial records in compliance with accounting and tax regulations.

Fixing the Period Close and Report Delivery

One of the most overlooked aspects of any accounting department is delivering information in a timely and accurate manner to executives or other members of management. A controller can be a good investment for a company that needs to improve how its financial statements are prepared and delivered.

Preventing Errors, Fraud, and Security Breaches

A controller is responsible for the accuracy of financial information. The controller ensures that the business has proper controls to prevent errors, fraud, and security breaches. In addition, a controller will often play a role in identifying business and financial risks.

Better Support of CPA (Tax Preparation)

If you are starting with CPAs, a controller can help support your tax preparation efforts so that you can focus on growing your practice.

Ownership of Accounting Department

A controller oversees the accounting department the same way a CFO manages the entire financial department. Controllers manage the day-to-day operations of the accounting department and assist in general accounting practices. They must ensure that the accounting team complies with generally accepted accounting principles.

When a Company Might Need a CFO

The chief financial officer (CFO) is an executive responsible for managing and overseeing your company’s finances. While many small businesses can get by with a controller initially, you will eventually need to consider hiring one if you plan on growing your business.

When should you hire a CFO? Here’s when you should consider bringing on a CFO:

Supervision of the Finance Team

Like any other department in a company, the finance team (e.g., controllers, accountants, and bookkeepers) requires strong leadership and guidance. It is the job of the CFO to ensure that the financial team is performing to expectations, both for the short-term and long-term success of the company.

Need for Sophisticated Reporting and Analysis

Once a company begins to grow exponentially, controllers and other finance experts may not have enough experience or knowledge to handle the company’s sophisticated reporting and analysis requirements. A qualified CFO help steer the finance team in the right direction and help drive a positive impact on the team. 

Financial Strategy and Guidance

A business might need help with expert financial strategies such as long-term projections and strategy formulation. The CFO becomes therefore participates and often leads those important planning sessions. 

Stakeholder Reporting and Communication

Partners of the company, including investors, banks, and boards, might want to see all the financial data laid out in a meaningful and attractive manner. CFOs are often required to prepare these materials and help present this data to CEOs and managers.

Fundraising (Capital Markets) Assistance

CFOs are usually knowledgeable in investments and market research and are often hired to take the lead on fundraising duties.  

What Size Companies Bring In Controllers?

The size of your company often determines how quickly you bring in a controller, a CFO, or both.

The controller’s role is to manage the entire finance team and a company’s resources. Most companies will hire a controller when they reach $1 million in annual sales, says Stephen Beatty, managing strategic advisory partner at S.G. Beatty & Co.

In contrast, companies will typically hire a CFO when they reach the $10MM, and almost all companies will have a controller by the time they get that revenue.

The controller is usually hired to handle more accounting tasks and oversee the accounting department. And if no CFO is present, they also act as the manager, reporting directly to the CEOs of the company. 

At the $10MM mark, the controller is almost always in a management role instead of handling other accounting tasks.

What Size Companies Bring In CFOs?

Generally speaking, the $10MM in annual revenue is when companies will consider bringing in a CFO. 

Controller vs. CFO Salaries

Both the controller and CFO are financial leaders in an organization, but they have different responsibilities. A chief financial officer (CFO) is above the controller, overseeing the finance department. A controller is often just below the CFO and leads the accounting team. 

As such, CFOs have more responsibilities than controllers and tend to earn more. For example, Career Explorer reports that the median salary is around $100K per year, while the top 20% earners in the U.S earn an average of $229K per year. 

According to Career Explorer, the average cash compensation for a controller is $71K, while the top 20% of earners are compensated an average salary of about $135K per year.  

Salaries for both roles vary depending on the company size and the location, but both careers are compensated very well compared to similar financial positions.

The Qualifications of Great Controllers

A great controller is essential for an organization to be successful. A controller must have a solid understanding of business and accounting principles that can be applied to businesses’ financial issues every day.

A suitable controller will have an excellent judgment in applying principles and practices to situations. A controller should have experience with managing internal controls, budgets, financial statements, and general ledger structure. But most importantly, a great controller must have the ability to lead other people and communicate effectively with management.

The following qualifications are essential for a controller:

• Bachelor’s degree in accounting or finance
• Certified Public Accountant (CPA) certification preferred
• Experience in financial statement preparation
• Experience with budgeting and analytical tools
• Experience with internal controls
• Experience working with auditors
• Experience managing staff members
• Exhibit excellent verbal and written communication skills

The Qualifications of Great CFOs

The CFO of a business is a vital part of the strategic team. They are responsible for financial planning and analysis, forecasting, budgeting and reporting, cash management, and risk management. The CFO is also responsible for formulating strategies to ensure that the company can meet its obligations.

The CFO is also involved in raising capital to help the company grow and prosper. In addition, the job entails working with outside banks and investors to establish relationships.

To be successful in this position, a CFO must have excellent communication skills, both verbally and written. They must be able to understand complex financial issues while explaining them in easy-to-understand terms. They also need to have strong analytical skills and a thorough knowledge of computer systems and accounting software programs.

Conclusion

Both a controller and a CFO are members of the finance department, but they play very different roles in the management of an organization. 

The controller is responsible for overseeing the work of lower-level accounting employees. In a smaller company, the controller may be responsible for supervising only one person, whereas, in a larger company, they may supervise multiple accountants and bookkeepers.

The CFOs role is much broader. Their part is to oversee and improve its operations and financial activities, both short-term and long-term.

How do you know if you need one of these specialists or both? It can vary from one organization to another, but you’ll want to prioritize both positions depending on your specific needs and the size of your business.

If you’re an entrepreneur, chances are one of your biggest questions has to do with the differences between C-corporations and S-corporations. While they have their similarities, they differ in several critical areas, such as how they operate, how these two entity types are taxed, and the ease with which they can be expanded.

Understanding the difference between these two entities is the first step toward registering your business legally. With the information below, you’ll be able to figure out the best option for your business.

What Is a Corporation?

A corporation is a group of people that is legally treated as if it was an individual. The people who own the corporation are called its shareholders. A corporation can make money and must pay taxes on that money, but unlike individuals, it cannot be put in jail for not paying its debts or for breaking laws. 

There are many different kinds of corporations. Most are businesses, such as a car-making company or a grocery store chain. However, some people use corporations to hold their other assets (like stocks, bonds and real estate) in order to save money on taxes.

A corporation is created by the government of a state, who issues legal papers called articles of incorporation. Sometimes it is possible to create a corporation without going through the state government by creating something known as an unincorporated association. This usually has to do with religious groups or nonprofit organizations like charities or libraries. 

The owners of a corporation (the shareholders) elect a board of directors to control the corporation’s business affairs and direct the officers (who may be directors themselves). The board hires managers and employees to run the corporation’s affairs.

What Is a C-Corporation?

A C-corporation is the default type of corporation. It is the only type of corporation subject to tax at both the personal and corporate level — this is called “double taxation.”

The corporation itself pays the first layer of tax, and then the second layer of tax is paid by shareholders when they receive dividends. When you incorporate as a C-corporation, you’ll have to file separate annual tax returns for your business and yourself. This double taxation can make C-corps expensive to maintain, but it also offers the most significant amount of legal protection for its owners.

Because C-corps are separate entities from their owners, they offer limited liability. They are treated as their entities in the eyes of the law and are therefore responsible for taxes, debts, and any legal action taken against them. Suppose something happens to the business (like going bankrupt or being sued). In that case, the owners aren’t responsible for the debts the C-Corp may incur, and shareholders will only lose what they invested in the company. Their assets are kept safe.

What Is an S-Corporation?

An S corporation is a particular type of corporation that can only be created through an IRS tax election and must meet specific requirements. If approved, an S-Corporation has the same legal structure as a C-Corporation regarding liability protection and ownership, but the difference lies in how it’s taxed.

In addition, forming an S-corp provides limited liability protection for its owners. And it does not require the formalities of regular corporations, such as maintaining corporate minutes or holding shareholder meetings. 

An S corporation does not pay any corporate taxes. Instead, the corporation’s profits and losses are divided and passed through to its shareholders. Shareholders must report their share of the profits or losses on their individual tax returns and pay federal income tax at their individual income tax rates. The shareholders must also report their share of the profits or losses and pay self-employment taxes if they are actively involved in the business.

This differs from other business entities, such as C-Corps, which are taxed twice — once at the corporate level and again at the individual level when dividends are paid out to shareholders. Therefore, the S-Corp election is less costly and allows small business owners to avoid double taxation while enjoying limited liability protection.

An organization can only attain s-corp status through the IRS if all its shareholders sign and submit the 2553 form. In addition, the organization must meet the following criteria:

• The organization has no more than 100 shareholders
• The organization is domestic and operating in its home country
• All the shareholders meet the IRS eligibility requirements
• The organization is not registered as an insurance company, a bank, or an international sales corporation

Attaining the s-corp status can be a complex and time-consuming process, but the tax-saving benefits can be beneficial once set up. 

How to Form a C-Corporation

Here’s a quick overview of how to form a C-corporation:

1. Pick a business name that follows corporate naming rules set out by your state.
2. Find and appoint directors of your c-corporation
3. Sign up and register your Employer Identification Number (EIN)
4. Register your C-corp by filing articles of incorporation
5. Issue your first stocks to the shareholders of your c-corp
6. Obtain all the necessary permits and licenses for your company

How to Form an S-Corporation

Your business must meet a few requirements to qualify for S-corp status with the IRS. Here’s a quick overview of how to get started:

1. First, check with the IRS and regulations in your state to make sure you qualify for the s-corp status.
2. Your corporation must be domestic and operating in the United States
3. It can only have “allowable shareholders,” meaning none of your shareholders can be non-US citizens or partnerships
4. Your c-corp cannot have more than 100 shareholders
5. It can only have one class of stock
6. It can’t be a bank, insurance company, or international corporation
7. You must then file Form 2553, signed by all of your company’s shareholders. 

5 Differences Between a C-Corporation and an S-Corporation

Here’s a quick overview of the significant differences between S corporations and C corporations to help you decide which is suitable for you:

Taxation

A big difference between how S-corps and C-corps work is how they’re taxed. C corporations are taxed at the corporate level, and then shareholders pay taxes again when dividends are distributed. S corporations do not pay any federal corporate taxes on their profits. Instead, the company’s income or losses flow through to the shareholders, who report them on their tax returns. 

Shareholders

A C-corporation can have an unlimited number of shareholders and stockholders. A shareholder is an individual or entity that owns part of a corporation. They hold shares of stock in the corporation, representing their interest and voting rights in the organization. And because of this, it is easy for a C-corporation to raise capital by selling shares. An S-corporation can only have a maximum of 100 shareholders/stockholders and must be United States citizens or residents. This restriction makes it difficult for an S-corporation to raise capital through selling shares.

Paperwork

S-Corporations have fewer reporting requirements than C-Corporations because they are not subject to double taxation. There is no tax at the corporate level and then again on profits when distributed as dividends to shareholders. It also means that shareowners don’t have to pay self-employment taxes on paid salaries.

Rights and Responsibilities

An S corporation has only one class of stock, which means that all shareholders have equal rights and duties in decision-making and profits/losses. On the other hand, C corporations have different classes of stock; therefore, some shareholders may have more decision-making power than others. In addition, certain types of stock can be set up to receive more profit sharing.

Ownership and Liability Protection

A C corporation can be owned by multiple investors, while an S corporation can only hold one investor or a partnership. In a C corporation, the owners’ assets are protected from company debt, while in an S corporation, they are not.

Questions I Should Ask Myself Before Becoming a C-Corporation or S-Corporation

Here are three questions you should ask yourself before becoming either a c-corporation or s-corporation status:

Do I Want to Limit My Shareholders?

A C-corporation can potentially have an unlimited number of shareholders. On the other hand, An S corporation is limited to 100 shareholders. This makes the S corporation structure more attractive for small businesses. However, if you expect your company to grow beyond that point, you might want to consider a C corporation.

Is Double Taxation Worth It?

Double taxation is one of the most significant disadvantages of a C-corporation. Even if you’re the sole owner, you’ll pay taxes on your profits twice: once at the corporate level when they’re earned and then again as personal income when you take them as dividends. In contrast, S-corps are only taxed once at the owner’s level.

However, there are some circumstances where double taxation can be worth it. For example, if your corporation has significant profits and you will be hiring employees in the future, a C-corp can shield those profits from personal taxes until they’re paid out as wages. That’s because wages are subject to payroll and income tax, but dividends aren’t subject to payroll tax.

In addition, your business might be more profitable if its taxes were paid at lower corporate tax rates than your income tax rate.

Is There Another Option That Works for Me? 

The most significant difference between C-Corps and S-Corps is their tax status. In the eyes of the IRS, a C-Corp is a distinct entity from its owners, so it pays taxes on its earnings. This is called double taxation (because the company and its owners both pay taxes on profits), and it’s a significant drawback to forming a C-Corp.

S-Corps don’t have to pay taxes on their earnings. Instead, profits and losses are passed through to the owners, who report that income on their tax returns. In other words, the company itself doesn’t owe any money — the owners do. But they only pay once, so there’s no double tax.

But there is another type of corporation called a limited liability company (LLC), which is also taxed differently.

LLC stands for limited liability company. It is a type of business structure that allows the owners to limit their liability. An LLC is similar to an S-corporation in that it is a separate legal entity from its owners. However, it differs from corporations in several important ways.

LLCs are considered “pass-through” entities, meaning the company profits and losses pass directly to the LLC members’ tax returns and are taxed at their individual income tax rates. This can save the business owner money on taxes over time if taxed at a lower rate than the corporate rate.

LLCs have fewer formalities than corporations. Unlike a corporation, LLCs do not need to hold annual meetings or keep minutes of meetings and resolutions. They also don’t have officers, directors, or shareholders.

An LLC is a business structure with its own rules, regulations, and tax obligations. An LLC can be used for any business, including real estate investment businesses, restaurants, or retail operations. Professionals like doctors and lawyers can also use an LLC to structure their practices.

Which Entity Type Should You Choose?

When it comes to forming a new business, many different paths and options are available to entrepreneurs. One of the first questions you’ll inevitably face is choosing what type of business entity you want to form.

Two of the most common business entities for small businesses are C-corporations and S-corporations.

Both C-corporations and S-corporations have advantages and disadvantages, so you must understand each one before deciding which one to pursue. This post covers all these aspects in detail.