September 22nd, 2011

Today we want to talk about your business’s financial information, and some key lessons you can use to better understand it.

If you don’t know, or can’t find out where your business is financially then the best business plan, business product and sales team in the world won’t save your business.  Remember, your cash flow and financial information are like your business’s heart beat.

And yet, time and time again we meet people at our Maui Mastermind conferences who insist on doing their business’s bookkeeping because they either don’t see the value in hiring a bookkeeper to do that work, or they don’t trust a bookkeeper to “get it right.”

It’s hard to hear those words coming from someone who isn’t a trained bookkeeper or accountant. It’s frustrating to see people nodding their heads in agreement about the need to take themselves out of the business in order for it to grow, and then dig in their heels on this issue. But here’s a truth we firmly believe:

Your business will NEVER reach Level Three if you hang onto the bookkeeping

Accurate and timely bookkeeping is critical to your business’s success. It’s also time-consuming, detail-oriented and, as the business owner, a complete waste of your time. Those hours you spend trying to enter receipts and balance the business’s checking account are hours you aren’t spending growing your business. And, in all honesty, unless you’re a trained bookkeeper you’ll probably do something wrong.

We’re not suggesting that you bring someone in to handle your business’s financial side and completely withdraw. What we are suggesting is that you:

  • · Bring someone in to handle the books or outsource that work to a contract bookkeeping service,
  • · Have at least a working knowledge of bookkeeping,
  • · Understand how to read basic financial statements and information,
  • · Establish strong financial controls, and
  • · Implement the systems you need to keep your business’s financial information secure.

Perhaps one of the best educational steps you’ll ever take is a night class in bookkeeping and basic accounting. Just having an understanding of double-entry bookkeeping (for every amount entered on the debit side there is a corresponding amount entered on the credit side) and what each of the three main financial statements (Balance Sheet, Profit and Loss Statement and Statement of Cash Flows) represent can put you miles ahead  of most business owners.

Now you’re in a position where you can knowledgeably monitor your business’s financial records without being bogged down in actually doing them.

At this point, learning how to prepare your own financial statements isn’t the lesson. Learning how to read and interpret the story behind the numbers is.

At the advanced stage Level Two, most business owners move away from an outsourced bookkeeper and hire a full-time controller.  The controller generally has more education and experience and has the ability to design systems and see the story behind the numbers.

And, finally, at Level Three, it’s time to get a CFO.  The CFO is able to forecast the intricacies of multiple businesses and investments and how it relates to owner’s personal financial statements.  It’s like the bookkeeper knows how to play checkers, the controller can play chess, and the CFO can play 3-D chess.  The differences have to do with perspective and ability, along with talent.

The final element of your business’s Financial Pillar is systems and financial controls. This is the place where you create the safeguards that will allow you to let go of the financial recordkeeping and still sleep at night. Yes, it is reasonable to have concerns about an unscrupulous controller or CFO raiding your business’s finances. However, the answer isn’t trying to control the risk by doing all of the financial work yourself. The answer is creating, implementing, and maintaining financial controls to protect yourself.

For example, even the smallest business should make a distinction between who writes the checks and who signs the checks, and between who creates the deposits and who makes them. As the business owner, signing checks and (at least in the early stages) making deposits are two things you should be doing personally. Separating the money-handling tasks is a key to preventing fraud and embezzlement.

As your business grows you will reach a point where it is necessary to bring additional people onboard to assist with the financial area. Again, as people come in you will want to separate tasks into those who look after money coming in and those who look after money going out. By always separating the process so that at minimum two different people would have to collude to steal, you are minimizing the chance of that happening.

You add a second layer of defense by establishing consistent audit procedures and other financial checks and balances.  These are standard financial practices and safeguards, so a great way to find out how your business should be structured in this aspect is to talk to your CPA, or, better yet, have your CPA work with you to design and implement your business’s financial safeguards.

Well that’s enough for one day.  We hope that you truly profit from these ideas on the financial side of your business.