accounting fundamentals – Cooper Mann Consulting

4 Rules of Thumb for Fiscally Fit Business

Most folks who start a new business go in to it with a rather naïve belief that a good idea, product, service and/or group of people can be successful just because their idea, product, service or people are good. Unfortunately, that isn’t’t the reality of starting up and running a business. Regardless of how great and innovative the idea is, the business only works if it is sustainable and profitable. Otherwise, it was just a great idea. For many entrepreneurs, developing an understanding of the financial underpinnings of running a company isn’t the most exciting of ideas. The compulsion is to outsource the responsibility to someone else like an accountant or financial advisor. While I completely and utterly agree that every business owner should work closely with their accounting professional and financial advisor, I also know that those very same business owners will get more value from their advisors if they have a common language to speak (business finance) and are working toward a common goal. The goal is fiscal fitness – the creation of a sustainable and profitable business. Just as physical fitness supports a healthy body, fiscal fitness supports a healthy business.

The successful business operating in this economy adheres closely to 4 main beliefs, rules of thumb perhaps, relating to fiscal management and fitness and which are generally communicated in detail using the language of business finance.

Rule 1. Plan before you start. Then plan some more. Starting a business isn’t like going to college; you’re supposed to know what you’re going to do BEFORE you start up rather than paying to explore the options. It is also very important to recognize that the plan may require some adjustments as you go along (“No plan survives contact with the enemy”), taking care to not equate focus with intractability. This plan should also include the “exit strategy”, which is really a plan for what the owner wants to ultimately get out of the effort. It could be a plan to sell out for gobs of money, to leave a legacy for the children, or maybe just to have an awesome quality of life and do what they love at the same time. Knowing what it will take to get in, get it done, and get out the way you want is all part of the plan.

Rule 2. Keep a close eye on the numbers. No, not all of them, but the really important ones. Some of these numbers have to do with the relationships between price, volume and cost. This is the stuff a business owner needs to know like the back of their hand – hairs and all. Not every business will focus on the same key numbers (mostly, but there are certainly variations), but every business owner should know what to look for. And they should be looking very frequently so things don’t get out of whack before corrections can be made.

Rule 3. Manage the cash, manage the growth, and know how one impacts the other. Cash flow and growth are priorities number 1 and 1 in business but they aren’t the same thing. Consider that reducing prices (and profits) to get more sales may work as long as the volume of sales supports the effort and generates the cash. Without the extra sales revenue to rely on, reducing profits could result in devastation (maybe sticking with the prices the way they are and not pushing for fast growth is a better idea).

Rule 4. If you must borrow, be informed and do it smartly. There are a lot of different options for borrowing money for the business, just as there are a lot of different reasons to do it. There is a great deal of research available which describes the benefits of borrowers being educated in basic financial literacy, with better financial decision-making being among those benefits. Looking for financing is kind of like choosing between the apple and the candy bar: one may promote the fitness you’re looking for while the other does not (but it looks sweet!). It’s nice to have the foundation to support knowing which one you should choose.

Building and maintaining a fit business requires an understanding of how the business works – how and why it makes and spends money, what makes it profitable and what it takes to create and support growth. While outside advisors may be available to help, the best performance is achieved when the business owner masters the essential skills required to run and grow a fiscally fit and sustainable business.

Joanie Mann Bunny Feet

Make Sense?

Measure, Manage and Succeed. It’s all about knowing how to speak the language of finance

Businesses and individuals alike must make complicated financial decisions throughout their lives. Sadly, the volumes of research which explore aspects of financial and debt “literacy” among individuals and small business owners reflects that a growing portion of the population lacks the understanding to make these decisions. Questions surrounding this issue often focus on the educational aspects, and the positive impacts which might be created through greater levels of understanding of accounting fundamentals and the basics of financial management. Particularly in smaller businesses, where there is a much closer relationship between business and personal finances, understanding even basic financial concepts is likely to lead to “better financial decisions and household well-being”.

a strong relationship between debt literacy and both financial experiences and debt loads [1]

Because many educational offerings tie to specific training approaches and methodologies, it becomes very difficult to measure the usefulness of the skills developed separately from the effectiveness of the training methodology. Trainers may employ specific devices or tools which facilitate their delivery, and often times these tools become more of a focus than the actual educational content. On the other hand, a program might provide a great deal of information in a fairly raw form, yet this information is unlikely to deliver a useful result if the participants do not understand it or cannot grasp the concepts introduced. The challenge is not only with providing the education, but finding a balance with the information and the outcomes; understanding how basic the training might be and still provide a measurable, beneficial impact.

In the study Keeping it Simple: Financial Literacy and Rules of Thumb, the authors discuss the benefits of teaching small business owners a series of fundamental “rules of thumb” for management of the business, rather than delving into the complexities of comprehensive business accounting and finance. Teaching participants about the basics of double entry bookkeeping, cash management and investing, and then coupling that information with instruction on essential processes to follow resulted in significant improvements in financial management and improved the accuracy and consistency of reported data.

the rule-of-thumb training changes actual business management practices [2]

Outcomes show consistently positive when a simpler approach to developing “financial literacy” is provided to small business owners, and particularly when the training and content is oriented towards the characteristics of the participants. The highest level of result was achieved with business owners with a low level of financial “sophistication”, with a limited interest in financial or accounting training, and with limited baseline business practice structure. These were the participants who were found to be most likely to implement what they learned in the “rule of thumb” training.

The conclusion drawn from these discussions is that financial education and basic accounting training can become a key factor in helping business owners not only account and report better for their businesses, but provides an essential foundation for understanding how to grow the business and create profitability. Accounting professionals working with small business clients should recognize that an effort to provide a level of education to clients is likely to not only help those clients make better business (and personal) financial decisions, it will also increase the chances that the client will keep better books and provide the accounting professional with more consistently useful information to work from.

After all, the goal of the accounting professional working with small business clients is to help those small businesses become successful businesses, isn’t it?

Joanie Mann Bunny Feet Make Sense?

[1] http://www.nber.org/papers/w14808.pdf

Debt Literacy, Financial Experiences, and Overindebtedness | Annamaria Lusardi and Peter Tufano| NBER Working Paper No. 14808|March 2009

[2] https://www.poverty-action.org/sites/default/files/kis-dfs-march2013_0.pdf | Keeping it Simple: Financial Literacy and Rules of Thumb | By ALEJANDRO DREXLER, GREG FISCHER, AND ANTOINETTE SCHOAR