3 Simple Accounting Rules for CEOs
Nearly every founder who becomes a CEO is typically the company’s first accountant and CFO. In some cases, they hold unto that position far too long. When they do, they are bound to create an accounting mess that is difficult and painful to clean up once they hire their first accounting manager. Until that hiring, I have three simple rules for the CEO who plays KPMG or PwC.
The 3 CEO Rules for Accounting
1. Ditch the Cash Basis for the Accrual Method for Reporting
Every CEO sets up her accounting system with ‘cash basis’ as the default setting. Please, don’t do that.
If you never want to grow your business and run your accounting system like a checkbook, select ‘cash basis’ as your default reporting method. Your entry-level CPA will love you, and you’ll be happy (presumably). However, plan to stay a small business for a very long time.
Without going deep on this topic, the accrual method will tell you if you are truly winning or losing. The cash basis only tells you when the money hit your account and when it left. On a cash basis, you’ll never understand your business performance.
The other beauty of the accrual basis is that you can easily do cash basis reporting and augment your information with a cash-centric rolling forecast by days or weeks.
Just because you use the accrual method doesn’t mean cash flow visibility is tossed out the window. Instead, cash flow reporting, analysis, and predictability increase when you adopt the right tools.
2. Always Use Account Numbers
I could rant on this topic for hours, well, for a few paragraphs. Just because your accounting system defaults to ‘no account numbers’ doesn’t mean that’s the right way to set up your account structure.
Without account numbers, it’s easy for the user, especially a CEO, to duplicate accounts, use too many accounts, and lose sight of the big picture since all accounts are listed alphabetically.
If you have 18 compensation accounts (12 to 20 is the norm in a small business), and if you know your compensation should be about 32% of net revenue, it’s not easy to grasp this quickly when the accounts are in no coherent order to ensure your business is not out of balance from a compensation point of view.
A proper account structure makes the reporting and the financial modeling far easier for the staff who will ultimately join you to do analytical work and continuous forecasting.
Always use account numbers in your accounting system.
3. Never Touch the Account Number Settings Unless You Know What You are Doing
This seems like a catch-22. You are supposed to use account numbers. Yet, you are not supposed to touch the accounting system unless you know what you are doing.
Let me give you a minute to ponder this dilemma.
Have you figured it out? I bet you have. Accordingly, let’s compare lists. Here’s my to-list that I’m betting you are already considering.
- Fire yourself from being your company’s accountant right now.
- Find your first accounting manager with the help of someone who knows what needs to be done before that hire is made and how to hire such a professional. I have the playbook and frameworks for this process. Warning: it’s a deliberate process that’s not super-fast.
- Never play accountant again. There are probably parts of that accounting process you probably like. Too bad; your job is to grow your business and elevate your team to its fullest potential.