As the business owner, your level of accounting literacy may make the difference between survival and failure. We know that’s a strong statement to lead with but the statement especially holds true during current economic conditions. New and increased revenue is tough to come by, and preserving cash and managing cash flow is more important than ever. Having a strong accounting and finance division is no guarantee of business success. We 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. 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 have sold your product or service you need to produce it and deliver it to the customer. The third department or function is accounting & 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 – all while producing profits and cash flow. Unfortunately, the accounting & finance division is often an afterthought and usually the weakest link for many small businesses. Nonetheless it is 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 depends a lot on the size and complexity of your business. We feel that all small business owners (revenues of under $10mil) must have at least a high school diploma level of accounting literacy in order to be successful. 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 them run the business.
The entrepreneur should be able to answer such questions as:
1. What accounting and 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 & bookkeeping systems to help reduce the possibility of fraud or loss?
Finally, here’s the most important question of all – 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. It’s up to them to establish an internal finance division that will help them with the answers to the questions above, or to turn to an outside resource to obtain the guidance they need.
So what level are you at right now? Do you at least have your high school diploma?
*At Financial Optics, Inc. it is our goal that the owner(s) can answer all these questions within 90 days of using our service. This is not 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. Future postings to this blog will help you answer some of these questions and start to improve your accounting literacy.