Do you know the difference between data, information, knowledge and wisdom? In the context of Accounting Information, data is the raw information (such as the receipts and invoices). This information is collected and recorded by a bookkeeper, who converts the raw data into Financial Statements: the P&L and Balance Sheet, with the help of an accounting software program.
Accounting Information is prepared for the business owner, and used for tax filings. You may have a CPA, an enrolled agent or use a tax software, but in all cases the information is only as good as the conversion from the raw data to financial statements. That is, the next step, from information to knowledge, Accounting Information has a high Gi-Go risk. That is, Garbage-In, Garbage-Out. The data from the receipts may be recorded incorrectly or categorized incorrectly, so the information created is not accurate. Of course, you think, That would never happen to me.
The truth is, almost every business-owner loves their bookkeeper, because their bookkeeper allows them to avoid thinking about their financial data. What the owner asks is Do I have enough money? Am I doing better? If the answer is YES, then most business owners don’t care to dive any deeper.
Yet, the majority of businesses have bad data – And this data is used to create their tax filings (Accounting Knowledge, using the terminology of the article). This may result in paying more taxes, or having a tax liability and penalty when audited. Generally, the tax person is not looking under the hood at the bigger issues of how the business is run or how performance and profitability can be enhanced. They take the bookkeeper’s output, Accounting Information, at face value.
That next step, which outside of the sphere of accounting information would be called wisdom, or experience, we would call Business Acumen. That’s where a financial consultant can help – ensuring that the Accounting Information is correctly categorized and then presented in a way that is useful information to the decision maker. A financial consultant is a person with business experience (Acumen) who can both dive into the details and share the view from 30,000 feet. In between are the levers to change and improve profitability.
Often, this involves converting the Accounting Information into ratios and graphs. With the right half a dozen ratios, the business owner can see the business from the perspective of a banker or investor. Knowing the drivers behind the ratios, the business owner can change the ratios making the business more attractive to a buyer, an investor or a banker. Different ratios and the information can be useful for goal setting with employees. Yet different Accounting Information is helpful in setting prices or focusing on costs.
Every business needs a P&L and a Balance Sheet, but most business owners struggle to see anything between the top and the bottom line. Their eyes go blurry and their attention wanders. This is typical, and yet owners feel guilty. They know understanding Accounting Information is important, but almost everything else seems more urgent.
This is one of the places a financial consultant can help – by converting rows of numbers that go blurry in your eyes into charts and graphs, showing you trends and influencing your goals and expectations.
Call me for help – I have access to several bookkeeping firms willing to take on new clients, especially in the areas of restaurants, food manufacturing and legal cannabis companies. I know business brokers who specialize in these sectors, as well as non-traditional lenders. I also know specialist in helping chains of restaurants or retailers into a franchise for rapid growth.
This concept of the data, information, knowledge and wisdom was developed by Russell Ackoff. Robert Sternberg has a model of wisdom that talks about evaluating the consequences for the individual, for the community, and the broader society. It also includes both short-term and long-term effects, and in the context of a set of values.
This is not the way most bookkeepers are looking at your business. Owners need someone in their corner who can help them turn information into business acumen and coach them to higher profits and cash flow.