Companies of all sizes are quite like human bodies, full of different parts that play extremely different but important roles in making sure everything runs properly. Just like a human body, some parts play bigger roles than others. In any company, big or small, the accounting & accounting function are like the brain, providing vital information which informs the decisions & actions of all the other functions in your company. Everything flows through accounting!
As a CEO, ensuring that your company’s accounting practices are in good health is of critical importance – it’s the center point for accuracy that can lead to an urgent red flag or at times, total chaos and loss of millions in profit before you ever see it coming.
“Every single red flag in the accuracy of your accounting drastically hurts your chances to raise capital, sell your business or obtain a bank loan”
-Scott Thompson (Partner, Foresight CFO)
If your business doesn’t have its accounting in order, you run the risk of not paying your bills on time. This can lead to vendors and suppliers, key partners to your business, withdrawing their services/products, bringing your business to a standstill. This has the knock on effect of impacting your business’ credit rating, which can cause difficulty when applying for loans, a necessity for small & medium size businesses looking to take the next step in their journey.
Poor accounting practices can also stifle a company’s plan for expansion by not accurately reflecting the financial performance of your company. Poor accounting practices can lead to the wrong information being shared to other parts of a company or a potential buyer of your business, either overestimating or underestimating your company’s performance, which can lead to the wrong move being made or excellent opportunities being missed.
The first leading culprit of poor accounting practice is not having agreed, documented accounting procedures in place that are regularly reviewed for efficiency and an alignment to the CEO’s strategy. If the CEO or investors are not getting the right reports, you cannot make confident decisions on the direction of business.
Having your accounting procedures clearly outlined and documented will ensure everyone is on the same page and aware of their duties in the process. Its vital for you as the CEO to enforce that these procedures are clear to all and followed at all times. This will ensure the financial information flowing through your company is accurate and make your job as CEO much more productive…and easier!
When developing your accounting procedures it’s also important to ensure that they are scalable. As your company grows, so too will the complexity of the business and the importance of understanding where the profits are and where they are not before burning through too much cash. By ensuring that your original accounting procedures are easily scalable you will be able to grow them alongside your business without the need for a complete redesign, ensuring that your financial information isn’t compromised by your growth but empowered by it!
Avoiding giving too much responsibility and control of accounting procedures to individuals will also keep your company in good health. As CEO, you want to avoid a situation where if one person is missing or moves on, the whole process will fall apart. You can also avoid a situation where individuals can manipulate the system by sharing the responsibility around and not giving individuals control over multiple stages of the process, just as long as the oversight is efficient and not a barrier.
Having clearly defined and documented accounting practices is key to Habit of Profitability™ number 2, Having and Using Your Financial Statements! Ensuring your accounting practices are watertight will allow you as the CEO to make the right decisions for your business, even in the most complicated of situations.
Having strong accounting practices in place in your company will also enable you to adopt Habit of Profitability™ number 3, Build A Rolling 12 Month Budget Profit. By having accurate, timely accounting you can make well informed assumptions on where the business is headed and where you may need to focus more attention. It will also allow you to prepare for “What If” scenarios, putting you in as strong a position to be prepared for the journey ahead and ready to capitalize on any opportunities that might emerge!
Follow Your Habits of Profitability™ Team for more insights!