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Financial Literacy for Business Owners & CEO’s: Do You Know & Understand Your Numbers?

Guest post by: Kenneth C. Halkin

Article Overview: In a study conducted by the Business Literacy Institute, the average business owner and executive scored only 38% on tests of financial literacy. Business Owners and CEO’s do not need to be CPA’s or MBA’s to be effective. They do need to have access to timely, accurate and meaningful financial reports and they must be able to intelligently use that information in their decision-making. Managing by your check book balance will not lead to long-term success.

Financial Literacy for Business Owners & CEO’s: Do You Know & Understand Your Numbers?

In a study conducted by the Business Literacy Institute, the average business owner and executive scored only 38% on tests of financial literacy. Business Owners and CEO’s do not need to be CPA’s or MBA’s to be effective. They do need to have access to timely, accurate and meaningful financial reports and they must be able to intelligently use that information in their decision-making. Managing by your check book balance will not lead to long-term success.

The following is a partial list of the kind of information that a business owner or CEO needs to know (in no particular order):

· For each product and/or service that I provide, what is the true cost of goods sold or cost of service provided?

· What is my gross margin for each?

· What is my total overhead expense?

· How much of this overhead should be allocated to each product and/or service?

· What is my actual profit margin on each, after allocating overhead?

· What is my break-even volume of sales, overall?

· What is my break-even volume for each product/service?

· What is the true profit or loss, on an accrual basis for the most recent period? Year-to date?

· What is my profit or loss on a cash basis?

· What is my overall liquidity?

· How do I best measure liquidity and overall financial strength?

· How do all of the above compare to other similar type and size businesses?

· What are my profits and cash flows projected to be over the next month? Quarter? Year?

· Am I over or under leveraged with debt?

· Based on cash flow projections, should I pay cash or finance that next capital purchase which I need to make?

To have accurate and timely answers to these and other important financial questions, one needs a system that accurately gathers and processes the information and a system to analyze and report the information in meaningful ways. These systems need to be developed and then they need to be maintained.

Depending on the size and complexity of the business or organization, relatively simple systems may do just fine, but the larger and more complex the business, the greater the need for more sophisticated systems. There is always a trade-off between the preciseness of the information and the amount of resources invested in developing and maintaining the system. There is a principle of “materiality” in accounting , which basically translates to, don’t’ spend a dollar accounting for a dime.

Designing your accounting and reporting systems requires informed decision-making, weighing accuracy against cost. This includes, determining the level of expertise and the number of staff that you need internally to design and run your system and what kind and amount of outside help that you may need. Many small businesses can’t afford to hire a full-time bookkeeper, let alone someone of a higher level of financial expertise. In this case, outsourcing for just what you need and can afford, may make more sense. However you choose to skin this cat, don’t let indecision stand in the way of your financial success!

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Article Tags: CFO services, nonprofit finance, small biz, small business, Small business finance



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