Why Small Business Owners Need to Understand Finance and Accounting

There was a story on CNN.com today about a CFO of a company in California who embezzled $9.9 million over a seven year period (Police: $9.9 million embezzlement led to layoffs at firm). I suspect that the owners(s) of this business did not actively participate in or supervise the accounting and financial reporting of this business.

This article made me think about the small business owners I’ve spoken to as a Nashville accountant who inform me that they don’t have the time to learn and understand their company’s accounting and financial management. They want me to set up their accounting correctly and then they want to pass the responsibility to someone on their staff.

I believe that you need to understand the accounting and financial reporting of your business. The primary reason for this is that accounting and financial reporting is the backbone of your company and it affects every functional area of your small business. Throughout my corporate career, I’ve observed that the best managers are the ones who understand this aspect of business.

I also feel that understanding your company’s accounting and financial reporting helps prevent fraud.  When you understand and actively supervise and participate in this area of your business, you are less likely to be a victim of fraud.

Some of the accounting policies and procedures I recommend you look at implementing include:

1. Company rule: only you are allowed to open the bank, payroll, and credit card statements;
2. Company rule: only you sign checks and all checks must have supporting documentation that you review while signing checks;
3. On a monthly basis, review the bank statement and cleared check images and ask questions;
4. Periodically roll your sleeves up and reconcile the bank statement;
5. On monthly basis, check expense reports to credit card statement and ask questions about expenses that don’t match or don’t make sense;
6. Periodically review transactions in your accounting system, especially cash, payroll, and payables; and
7. Periodically participate in paying bills and payroll.

This list isn’t all inclusive, but it represents some of the actions you can take to prevent employee fraud at your firm. However, the only way you can implement these items is to have an understanding of you business’s accounting and financial reporting.