As an entrepreneur, there are few things as important to your survival and success as being financially prepared. Without having money to hire employees, pay yourself, and to invest in expanding your business, you won’t grow, and soon enough, won’t be in business. However, few entrepreneurs take the time and care to learn what they need to know to handle the financial side of their business – including accounting, bookkeeping, taxes, and financial planning, forecasting and analysis.
While entrepreneurs lacking the time and knowledge to put a healthy financial system into place is a problem, the more significant problem that exists in most businesses is not having ANYONE handling the financials with care.
You see, you don’t have time to do everything in your business, but someone does have to have time for it.
To help entrepreneurs analyze where their business stands regarding accounting and bookkeeping preparedness, we created an upside down pyramid (because that’s how most of our financial systems look). The pyramid consists of the six levels of preparedness we see in the businesses we work with at Kahuna Accounting. Starting at the bottom, here are the six levels:
Level 1: No system in place
If you are taking your business seriously, this can’t be you. Too many entrepreneurs have nothing in place and then check back at the end of the year to scramble something together to see how they did.
This provides no accountability or insight for the business, and will likely cost you money in taxes and put you at risk for doing something wrong. Also, you have no way to look forward using financial statements and projections. If you have financial goals for your business, having no system in place is a sure way to avoid accomplishing them.
Level 2: You have just enough in place to file taxes
Many entrepreneurs and small business owners fall into this category. Maybe they have Quickbooks or Xero, and typically catch things up whenever they can. Some things fall through the cracks. It’s mostly reactive, but at least it’s good enough to get a big mess to the end of the year to file taxes and to blindly put worry behind them for another year.
They have no insight into the business and this “system” creates a lot of anxiety because they are uninformed on the business and not prepared to grow forward.
Level 3: You have systems and reporting in place, but you don’t know what it all means
The next level is to get a financial system in place that works but you don’t understand what anything means. This is when you first hire a bookkeeper or get someone to “keep the books” for you. Accounting is still seen as a necessary evil for you, but at least you’ve gotten it off your plate.
Unfortunately, you’re still missing out on a great opportunity in knowing the story your numbers tell you. Many business owners have the books done, but have no idea what the reports mean or how to mine them for key information. Even if you have help with the books, you are still very limited if you’re not tracking reports and analyzing the numbers.
Level 4: You have systems and a financial team in place, but you’re still looking backwards
Now we’re starting to get to the top of the pyramid where you’ve got your stuff together. This level is getting financial reports every month and looking at, and understanding, those reports. This is a pretty good place to be.
The only limiting factor here is if you’re only looking backwards, which is extremely common. Many CPA’s are only going to provide a recap of what has already happened. Don’t get me wrong, there is insight to be had in those numbers. But still – that already happened. You can’t change it!
Looking backward won’t get you to the top of the pyramid nor will it get you to where you want to take your business.
Level 5: You have systems in place, reports delivered monthly and you relentlessly track KPI’s (Key Performance Indicators)
The next level is when you build out KPI’s (Key Performance Indicators) and track them regularly. Some examples of KPI’s to track are: average margins, debt ratio and net profit percentage.
The goal is to find key numbers for your business that you’ve identified as key drivers for success, then track them for a snapshot of how the business is performing.
Level 6: Systems, reports, KPI’s and cash forecasting delivered monthly and used for planning and business growth, including hiring, raising capital, etc.
The final level is when you have a CFO or VP of Finance who is by your side and is a constant sounding board for all things financial.
You get the reports, forecasting, budgeting and even strategy from a financial view point. This is not a number cruncher, but someone who can take financial reports, and help you make decisions based on what is coming ahead.
This is the level all businesses should aspire for, because when you combine the insight and forward thinking with numbers and the vision of an entrepreneur, that’s where the magic happens.
Want to take your small business to level six? It starts with having a functional and consistent system in place and having a team ready to help along the way.
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