The ‘accountability gap’ - in simple terms, the gap between operational and technical financial knowledge in a business - is a fundamental part of the framework that financial consultant Adrian Goodman works through with a new client. He explains the process and the benefits to both sides.
WHEN I work with clients, I frequently refer to ‘The Accountability Gap’. A business owner knows the operational finance elements of their business and industry – key items such as purchase prices, selling prices, delivery costs and achievable profit margins. They also know industry-specific threats and opportunities.
However, they typically have a limited understanding of accounting concepts and technical finance, which can impact the correct calculation of profit and therefore hamper decision-making.
An accountant is the opposite. They are technically skilled and usually qualified, with a wealth of experience in calculating and classifying transactions and a firm understanding of relevant laws and regulations. However, they are generally far less knowledgeable than the business owner when it comes to their specific organisation or industry.
Between the two, a reasonable degree of overall financial literacy exists in the business. Over a long and cooperative relationship, both parties learn more about each others’ specialist areas and this financial collaboration improves. It’s no surprise that the business becomes more successful when this happens.
However, the accountant will never spend enough time in the business to truly understand the operational finance elements, and the business owner is unlikely to study accounting, so the Accountability Gap will always exist to some extent, until the business grows to the point where it can justify the expense of a full-time Finance Director.
In the meantime, even if the gap can’t be closed completely, there are ways it can be bridged.
- Additional services from your your accountant – Many businesses engage their accountant to produce their year end accounts and tax return, which is the bare minimum service an accountant can
- Improve the financial literacy of the business owner – If the business owner has a fundamental understanding of accounting principles and technical finance, they can not only analyse the data in house but also have a better understanding of the data provided by their
Of the two options outlined, the second point is far more likely to lead to greater finance knowledge in the business and therefore enhanced success. There are several reasons for this.
Firstly, you can’t become an accountant overnight, but you can learn rudimentary financial concepts quite quickly. Your accountant won’t have the time or resources to replicate your industry-specific knowledge anywhere near as quickly.
Secondly, you may decide to change accountants at some point, and then any understanding they had of your business is lost, whereas your financial knowledge, once learned, is there to stay.
Ultimately, however, it comes down to accountability. You are accountable for all aspects of your business, including finance. It’s your responsibility to not only understand your accounts, but potentially challenge the data presented by your accountant. It’s impossible to do this if you don’t understand it.
There is a proven statistical correlation between the success of a business and the financial literacy of the owner. If you want your business to succeed, this is something you need to work on.
Adrian Goodman is the author of Achieving Profitable Growth, a guide to establishing profitable growth in business.
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