Things to remember when evaluating company finances
Recently I was having a lively debate with a friend and client of mine who has a successful practice as an orthopedic surgeon in the Bay Area. We were bantering back and forth about the knowledge necessary for one’s own profession. He said to me quite plainly: “Tanya, I am trained as a surgeon. You, as an accountant. We cannot be expected to understand the intricacies of each other’s profession.”
While I agree with the sentiment, I can’t agree with all of it. It’s true. I know nothing of what it takes to become a skilled surgeon. Nor could I hack it in med school or in residency for that matter. But, I don’t need to understand orthopedic surgery to run my company. Orthopedic surgeons however, do need a basic understanding of finance for you to run yours. And this is true for entrepreneurs in all lines of business. Accounting is the common thread.
An aversion to accounting is not unique to any one profession. I have clients that sell, construct or create every type of widget or service that can display a strong aversion to the number stuff. And, quite frankly accounting is dry. “I’m a CPA” is not typically fodder for an intriguing, in-depth conversation about the issues of the world at a cocktail party. “You don’t seem like a CPA” has often been one of my favorite compliments.
But, if you are self-employed and if you remember nothing else about accounting, remember these three things when evaluating the finances for your company:
1. You need to be intimately familiar with your break even point. By break even point, I don’t mean what you think it is. I mean what the cold hard numbers say it is. Break even is a relatively straightforward formula but one that is vital to your company’s ongoing success. Break even simply put is the point at which your sales cover their costs as well as your monthly overhead. Everything from there up is gravy, but you have to know where there is first.
2. Internal control is king. Many a company that was once wildly successful has been brought to its knees by employee theft. Internal control needs to be a natural extension of not only your internal procedures but also your corporate culture. And I get it: talking about employee embezzlement is not exactly uplifting but the other side of the coin leaves your business at serious risk. Controls are all around you as a consumer: the fast food restaurant that will buy your lunch if you don’t get a receipt, the retailers that require the same credit card in order to credit back a purchase and the warehouse store that checks your cart as you leave. How will you put internal controls in place in your business?
3. Taxes come in many disguises. You should have at least a rudimentary understanding of how you are taxed — both as a company and as an individual. It’s not just income tax you are facing as a business owner. It’s also self-employment taxes, payroll taxes, capital gains tax, sales and use tax, state income tax, additional corporate income taxes, etc. Be very aware of how these affect you and what they add up to for you and your business. If going to the dentist sounds more attractive than sitting through a webinar on any of the aforementioned tax topics, ask your CPA to give you the lowdown on what to expect as well as how they will effect undoubtedly affect you.
Forcing yourself to get familiar with these three concepts will truly help you to understand your company’s heartbeat even more than you already do. These are fundamental concepts while every business owner needs to be familiar with. Grappling with the basics will give you the knowledge you need without spending more time on accounting than you have to. Then, you can run off to wear the other hundred hats you must wear to be a successful entrepreneur.
Tanya McCaffery, CPA, is CEO of VAST powered by the CFO Group. She can be reached at 775.359.7600 or firstname.lastname@example.org.
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