Written by Tim Sernett, Accounting & Finance Advisor for SMBs | Owner at Financial Optics Inc | Entrepreneurship enthusiast | Dad | Sports nut | Tuition paymaster
As a business owner, your level of accounting literacy may make the difference between survival and failure. I know that’s a strong statement to lead with, but it hold true during the ups and downs of economic conditions.
New and increased revenue can be tough to come by, and preserving cash and managing cash flow is critically important. As I’ve said before, having a strong accounting and finance division is no guarantee of business success.
But I can guarantee the long-lasting successful businesses that meet the long-term wealth expectations of the owners DO have a strong accounting and finance department.
Here’s why. Most small business experts will agree that there are three main functions or departments in every business. First and foremost is sales and marketing – we’ve all heard the line that nothing happens in business until something is sold. Second is the production and distribution department – once you’ve sold your product or service, you need to produce it and deliver it to the customer.
The third department or function is accounting and finance – once your business has sold its product or service, then produced and delivered to the customer, we now have to account for the money and make sure we can repeat this cycle over and over again while producing profits and cash flow.
Unfortunately, the accounting and finance division is often an afterthought and usually the weakest link for many small businesses. Nonetheless, it’s a critical function for any successful small business, and business owners need to have some level of accounting literacy to be successful.
So what level of literacy is required? Do you need a PhD, or a high school diploma? The answer to that question depends a lot on the size and complexity of your business, but I feel that all small business owners (revenues of under $10mil) must have at least a high school diploma level of accounting literacy.
An entrepreneur must have an understanding of what information the accounting department should be providing on a regular basis, as well as what customized information would be valuable to help her run the business. The entrepreneur should be able to answer questions like:
1. What accounting & finance reports should I be looking at?
2. How do I interpret the reports?
3. How can I use the information to help me improve profits and cash flow for my business?
4. How often should I be reviewing the reports?
5. What are the key performance indicators I should be looking for in the reports?
6. How do I design my accounting and finance systems to ensure the timeliness and accuracy of the reports?
7. How do I design my accounting and bookkeeping systems to help reduce the possibility of fraud or loss?
Finally, here’s the most important question of all…
8. Does my accounting and finance department have the competency to help me answer all these questions?
Many entrepreneurs start out in business without the accounting literacy they need. So it’s up to them to establish an internal finance division that will help them with the answers to the questions above. If they don’t go that route, they must turn to an outside resource to obtain the guidance they need. At Financial Optics, Inc. it’s our goal that the owner(s) can answer all these questions within 90 days of using our service.
This isn’t about the business owner being involved in the day-to-day bookkeeping and compiling of the information, but more about knowing what the expectations should be of the accounting and finance department.
So what level are you at right now? Do you at least have your high school diploma?
Thank you for taking the time to read the Financial Optics blog! If you have any questions about this post or any other questions, give us a call at 913.649.1040.