It’s tax season, a time when finance—and finance management—is on all my clients’ minds. So I usually take the opportunity to ask them: “Are you abdicating or delegating your finances to your accountant?” In other words: Do you defer to your accountant, waiting for them to give you financial results that’ll help you better lead and manage your business? Or do you already know the results they’ll give because you know how to read the financials yourself?
Most clients start by abdicating—and it puts them in a risky position.
These business owners know a little—but not nearly enough—to be proactive in the financial management of their companies. They can read their Profit and Loss Statement, but at the end of the year, they don’t know how they got to where they are. But there’s a story behind these numbers, and if you want to grow and protect your business, you need to understand it. As a business coach, I urge every client to take charge of their finances: to understand (at a bare minimum) what they’re looking at on their Balance Sheet and to know their Key Financial Indicators and cash position. It’s the only way to build the business they’re dreaming of. So here’s how.
Start with the basics
I admit, delegating requires more work from you, the business owner, than abdicating does. It’s a big shift to get a hand on finance so you know exactly what work you’re outsourcing and understand fundamentally what you expect to get back from your contractors. But here’s the bright side: You don’t need to be a numbers expert to get in tune with finance; you simply need to educate yourself to proactively manage budgets and cash plans—which is a part of your job as a business owner.
Consider the financial position of your company today. Do you know what led you here? Do you know how to read your Key Financial Indicators? Did you create a tax plan in the 4th quarter to make strategic moves that maximize profitability and optimize your tax position? If you’re answering no, you could be doing more to retain investment in your business. The best place to start is by learning to understand your two fundamental financial trackers: the Profit and Loss Statement, and your Balance Sheet.
Learn to understand your balance sheet
Your Balance Sheet is a snapshot of the general financial condition of your business. It summarizes what your business controls (assets), obligations it owes to others (liabilities), and its owner equity to show your company’s health and vitality.
In my time as a Coach, I’ve walked many clients line by line through their Balance Sheet—not because I’m a micromanager, but because it’s the background of their day-to-day financials. And truth is, most business owners don’t have any understanding of this basic tracker.
Even if you have a solid finance team (and even if this “team” is only one bookkeeper), you must know how to read and understand your Balance Sheet. If you haven’t done so, take your Balance Sheet now, go through each line, and ask yourself:
- Do I understand what this line item represents?
- What is the relationship of my debt to equity? Of my assets to liabilities?
- What is my cash position?
- How old are my Aged Receivables and Aged Payables?
If you learn to answer these questions, you’ll have the ratios and basic indicators you need to get in tune with your monthly and quarterly finances.
Shape up your profit and loss statement
Also called your Income Statement, the Profit and Loss Statement (P&L) measures your company’s performance and profitability by comparing your costs to revenues during a certain period of time.
If you don’t know the details of your P&L, you’re not alone. Truthfully, most of my clients start without a high-level understanding of how to organize this critical reporting system. (Notice I said critical there.) They look at it occasionally and can even recognize when things aren’t right, but they don’t understand how to structure the statement in a way that helps them see what isn’t aligning. Ideally, your P&L should be segmented to show you the budget for every department, both as individual units and in terms of how they fit into your organizational strategy.
So ask yourself: Does your Profit and Loss Statement…
- …represent fixed and variable costs?
- …represent your different departments and overall organizational strategy?
- …show either an accrual method or a cash method of accounting?
Build your financial team
While you’re learning to understand your financial statements, you should also be building an internal team that’s right for your company. Your role (no matter your level of financial know-how) is that of interim CFO. You assume the strategic level of financial management in your company, so it’s up to you to hire the managers and technicians needed to do the detail work and guide you to making valuable leadership and management decisions.
Decide which internal roles you need to fill
Before I was an EMyth Coach, I was a client. I learned through the EMyth Program and my accounting firm how to build the right in-house team. In the beginning, I only had a bookkeeper (someone who oversees the accounts payable and receiving. As my company grew, we brought in a controller to manage all transactions, payables, bank reconciliations, payroll processing, and tax filings—all the critical information you’ll use to make decisions for your own company.
For most small business owners with gross annual revenues under $5M, your bookkeeper and controller are the same person—and that works well. You can choose to hire a bookkeeper and grow them into a controller, or hire a controller who will also do the bookkeeping. Whichever option you choose, make sure they have a clear Position Agreement, and modify that Agreement as you grow your team.
Select the right accountant for your business
When I started my first business, I was a classic new owner: I trusted my accountant to guide me. I selected my first accountant to suit my then medium-sized company with its $3-5M in annual sales, and I didn’t make the right choice the first time—or the second.
My first accountant was a sole practitioner, who I chose because I didn’t feel my company needed a big firm to manage our finances. But I soon learned that the sole practitioner didn’t have enough general experience with small business financials. When it came time to talk about strategies and proactive planning, he fell short, and we soon outgrew his services. My next choice was a large firm. And while they checked the strategic planning boxes—and taught me a lot about how to manage and understand my own finances—they weren’t protecting me in the way I assumed they would. I suffered a major loss under their radar, something I never imagined could happen. And though I was becoming more and more in tune with my company finances, I didn’t know enough about internal controls and segregation of duties to protect my company myself.
I learned two valuable lessons from these experiences. First, that even a good accountant is never going to do it all; I needed to learn how to recognize the signs that something wasn’t right, so I could be the watchdog for my business. Second, I realized that I didn’t choose my previous accountants based on my brand and values.
Through the EMyth Approach, I coach my clients to base every business decision on their brand and values; this is as true for a building a marketing strategy as it is when choosing an accountant. Finding a firm or contractor who aligns with your values first and foremost is essential. So when I chose my third accountant, I took the EMyth process for hiring an internal team and applied it to find the perfect fit. I knew that leading with my values mattered—that I needed to find someone who was a true extension of my company. That was 19 years ago, and you know what? I’m still with the same firm I found through that process.
Design systems that validate all transactions
The bottom line here is that we’re talking about risk on many levels. Abdicating your finances either internally or to a contractor can lead to mismanagement at best, and sometimes leads to much more serious financial problems. Most small businesses don’t have the capital foundation to survive a serious breach, so educating yourself in the financial health and position of your business is the necessary first step. Next is to trust and verify. Yes, you want to hire and trust your financial team in order to create a healthy and productive culture; but you also need to have the systems in place to verify that things are working properly, ensuring that you properly segregate duties and have the internal controls in place to proactively protect against any issues.
So as you wrap up your business taxes for this year, remember that it’s also the end of the 1st quarter—and there’s no better time to get your financial house in order for 2020.