Overcoming the fear of accounting and finance in 2015
Yaneek Page, Contributor
People often start business with the aim of becoming their own boss, making large profits and creating personal wealth.
Unfortunately, a significant number of small business owners have never done a budget, or financial projections. They don't know how to properly cost their products and services or prepare a payroll.
They have no idea how to manage their cash flow, whether they are maximising shareholder value or if and when they need financing.
Worst of all, many have no idea whether they are making a profit or a loss until they have no choice but to close the business.
The problem is exacerbated by some entrepreneurs' limited finance knowledge, the seemingly unaffordable cost of hiring an accountant during the start-up and early growth phase, and our highly convoluted and cumbersome taxation apparatus. In case you missed it, Jamaica is now ranked 58th best place in the world to do business, up from No. 94 the year prior, in the Doing Business Report 2015.
Despite that momentous leap, this is still one of the worst countries in the world to pay taxes, with a ranking of 147 out of 189 countries. To add insult to injury, there remains an attitude by some tax collectors that business owners are tax cheats, who specialise in evading taxes.
I believe the majority of small businesses are willing to pay their taxes, but don't grasp the complex calculations and filing paperwork, can't afford to hire an accounting expert and don't trust the tax authorities to assist with their best interest at heart.
Policymakers are too slow to recognise that it's absurd to expect entrepreneurs to dedicate several days, every month, to navigate the taxation minefield when they are struggling to figure out how to earn enough to keep the business afloat in an infamously challenging business environment.
So how can we help thousands of small businesses overcome financial illiteracy, and accounting/tax fears? Here are some solutions:
1. Give businesses accurate and complete information. Government must make it easy for all types of businesses to access information on all statutory obligations in one place, including those taxes and fees payable to the local authorities.
2. Implement tax reforms that will allow entrepreneurs with even marginal accounting knowledge to easily calculate taxes, complete and submit payments. Revise tax rates - they are too high and inequitable - and the draconian interest and penalties many businesses have unjustly incurred because of ignorance of a complicated system.
3. Greater empathy from tax collectors and recognition that they'll earn more from customers over a longer term if they genuinely support compliance. Tactics such as contacting the media to cover raids ruins taxpayers' reputation and business and reinforces the view that you're mercenaries to be feared, not trusted.
4. Greater access to affordable, proficient accounting services for small businesses.
5. Businesses must step up to the plate, build their finance capacity and commit to adopting good accounting principles as a means to growing and sustaining their businesses.
Overcoming finance fears first requires an acceptance that it's possible to hate accounting and still operate a successful business. The key is learning to manage rather than trying to master finance.
By this I mean don't force yourself to try to become an expert in a field you hate. It's unnecessary and counterproductive. Instead, learn the basics to help you manage your finances and then hire competent experts to execute. This way, you direct your energy where your business needs it most - strategic management.
So what are these finance 'basics' you need to know? They are: understanding the difference between accounting and finance, becoming familiar with the accounting cycle, knowing the main financial statements, and knowing what to look for in an accountant - what questions to ask and how to manage the relationship between yourself and your accountant.
While I can't address all of these in this article, I will explain the first and most important one below and explore the remaining 'basics' in another column.
Although accounting and finance are closely related and often used interchangeably, there is a critical distinction to be made between the two.
Accounting encompasses preparing and maintaining accounting records, preparing and analysing financial statements, costing, payroll and taxation, etc.
Accounting is a subset of finance. Finance has a broader perspective and is concerned with the efficient and effective management of the company's assets, liabilities and investments. For example, whether the business is maximising shareholder value in the short and long term, if the resources are being efficiently and effectively allocated, and ensuring that the company's assets and liabilities are well managed so that strategic projects and initiatives are appropriately financed while properly managing associated risks.
When planning for long-term success, small businesses must use the accounting information to assist in making sound finance decisions for the future.
Yaneek Page is an entrepreneur and trainer in entrepreneurship and workforce innovation. Email: firstname.lastname@example.org. Twitter: @yaneekpage. Website: yaneekpage.com.