Why Most Small Business Owners Never Understand Their Numbers (And What to Do About It) | Danielle Hayden

Why Most Small Business Owners Never Understand Their Numbers (And What to Do About It)

Most small business owners did not start their business because they loved bookkeeping. They started it because they were good at something and decided to build a career around it.

The financial side of the business came along for the ride, often unwelcome.

Danielle Hayden is a CPA, former corporate CFO, and the CEO of Kickstart Accounting Inc., where her team of nearly 50 serves thousands of small business owners through bookkeeping, CFO services, and tax preparation. In a recent conversation on Your Profitable Law Firm, she explained why so many business owners avoid their finances, what it actually takes to have clean books, and how understanding your numbers changes the way you make decisions.

Why Business Owners Avoid Their Finances

Danielle's answer to this question is not what most CPAs would say. She does not point to complexity or time constraints as the primary reason. She points to childhood money stories.

A childhood money story is the set of beliefs a person formed about money growing up, often without realizing it. Money is stressful. Numbers are for other people. Looking at the finances means seeing something bad. Rich people are lucky, not skilled.

These stories are not consciously held. They operate in the background. And according to Danielle, they are running the financial decisions of a significant number of small business owners who are otherwise intelligent, capable, and hardworking people.

The owner who avoids opening their P&L is not lazy. They have a story playing in their head that tells them what they will find when they open it. And the story feels true enough that the avoidance feels safer than the look.

Danielle's approach is to address this layer first. Before talking about chart of accounts, before explaining the difference between cash and accrual, before building a budget. Until the owner can look at their numbers without a fear response, the technical information will not land the way it needs to.

The Difference Between Bookkeeping, Accounting, and CFO Services

One of the most practical things Danielle covers with new clients is the distinction between these three functions, because most small business owners use the terms interchangeably and end up with gaps in coverage they do not know exist.

Bookkeeping

Bookkeeping is the recording of financial transactions. Income in, expenses out, categorized correctly and consistently. The output of good bookkeeping is an accurate set of financial records. The bookkeeper is not responsible for analyzing those records or telling the owner what they mean. They are responsible for making sure the records reflect what actually happened.

Accounting

Accounting uses the records the bookkeeper created to prepare tax returns, financial statements, and periodic reports. An accountant or CPA brings a higher level of technical knowledge to the interpretation of the numbers. But in most small business arrangements, the accountant or CPA is working at filing time, not throughout the year. Their view of the business is primarily historical.

CFO Services

A fractional CFO uses the financial records to help the business owner make better forward-looking decisions. Cash flow planning. Pricing strategy. When to hire. Whether a new revenue stream makes financial sense. The CFO function is advisory and forward-facing. It assumes the bookkeeping is accurate and the accounting is current, and it builds from there.

The breakdown Danielle sees most often: an owner has a bookkeeper but not an accountant, or an accountant who files taxes but no one who reviews the books monthly. The result is that decisions are made without current, accurate financial information. The books might be six months behind. The tax return reflects what happened last year. And nobody is looking at what is happening right now.

What Clean Books Actually Look Like

Danielle is direct about what she means when she uses the phrase clean books, because it means something specific that is often misunderstood.

Clean books means the financial records accurately reflect every transaction that occurred in the business during a given period. Income is recorded when it was received. Expenses are categorized to the correct accounts. Bank accounts are reconciled monthly against the actual bank statements. Nothing is sitting in an uncategorized or miscellaneous account. The records are current, not weeks or months behind.

Clean books are the foundation for everything else. A meaningful P&L requires clean books. A useful cash flow forecast requires clean books. An accurate tax return requires clean books. A fractional CFO's work requires clean books.

When books are not clean, every financial conversation is suspect. The P&L might show strong profit while the owner has no cash because distributions, loan payments, or uncategorized expenses are distorting the picture. The bank reconciliation might be six months behind, meaning nobody actually knows whether the numbers are right.

Danielle's standard for clients: books should be reconciled and current within the first week of each new month, so the owner has accurate information about the previous month before too much time has passed.

How to Know If Your Bookkeeper Is Actually Doing the Job

This is one of the questions most law firm owners do not know to ask. Danielle gives several practical tests.

Test one: Are the bank accounts reconciled monthly? This means the bookkeeper is comparing every transaction in the accounting system against the actual bank statement and clearing every item. If the reconciliation is not happening monthly, the books are not reliable.

Test two: Are there transactions sitting in an uncategorized account or a catch-all miscellaneous account? Every transaction should have a specific, accurate category. Large miscellaneous balances are a sign that the bookkeeper is not taking the time to categorize correctly, or does not know how.

Test three: Can you get a current P&L on demand? If your bookkeeper cannot produce an accurate profit and loss statement for the most recently completed month within a reasonable timeframe, the books are behind. Behind books mean the financial picture you are seeing is not accurate.

Test four: Does your bookkeeper flag unusual transactions or ask clarifying questions? A good bookkeeper knows when a transaction does not look right and asks about it. A bookkeeper who never asks questions may be categorizing things without enough information to do it accurately.

The Monthly Financial Review Habit

Both Danielle and Kelley emphasize the same point from different angles: looking at the numbers once a year at tax time is not financial management. It is hindsight.

The habit Danielle builds with clients is a monthly financial review. Pull the P&L. Compare revenue and expenses to the prior month and the prior year. Look at the bank balance. Check accounts receivable. Ask the same few questions every month: did revenue come in as expected, did expenses stay in line, and is there more or less cash available than there was 30 days ago?

The questions do not have to be complicated. The discipline is in asking them consistently, with current and accurate information, and then doing something with the answers.

Business owners who review their numbers monthly make different decisions than business owners who review them annually. They catch problems earlier. They see trends before they become crises. They can act rather than react.

How to Pay Yourself What You Are Actually Worth

This is a topic Danielle returns to frequently with small business owners, because it is one of the most emotionally loaded financial decisions an owner makes.

Most small business owners pay themselves last, if at all, or take distributions based on whatever is left in the bank account rather than based on any intentional calculation. The result is owner compensation that is either inconsistent, undersized relative to the value of the work being done, or both.

Danielle's framework starts with two questions. What would you have to pay someone else to do your job? And what does the business actually generate that is available for owner compensation after operating expenses are covered?

The answer to the first question establishes a floor. The answer to the second establishes the ceiling. Somewhere between those two numbers, with an eye on cash flow and tax implications, is a sustainable owner compensation structure.

For S corporation owners specifically, reasonable compensation also carries tax implications that make this decision more complex. The amount the owner takes as W-2 salary versus distribution affects both the firm's payroll tax obligation and the owner's Social Security and Medicare contributions. This is an area where the bookkeeper, the accountant, and ideally a CFO should all be involved in the decision, not just one of them.

Cash vs. Accrual: The Question Most Business Owners Get Wrong

Danielle covers this topic regularly because the choice between cash basis and accrual basis accounting has meaningful implications that most owners do not understand when they set up their books.

Cash basis accounting records revenue when cash is received and expenses when cash is paid. It is simpler and more intuitive. The bank balance and the accounting system tell roughly the same story.

Accrual basis accounting records revenue when it is earned, even if the cash has not arrived yet, and expenses when they are incurred, even if they have not been paid. It presents a more complete picture of the economic activity of the business but can create significant differences between what the P&L shows and what is in the bank account.

For most small service-based businesses, cash basis accounting is appropriate and sufficient. For businesses with significant accounts receivable, inventory, or contractual obligations that span accounting periods, accrual basis is more accurate.

The problem Danielle sees: owners who are on accrual basis without understanding why, or owners who switch between methods without understanding the implications for comparability of their financials over time. The method matters less than understanding what it is and what the numbers it produces actually mean.

Key Takeaway

The numbers in your business are not a test you pass or fail. They are information about what is happening, and you can either use that information to make better decisions or ignore it and make the same decisions by instinct.

Danielle's core message, stripped to its simplest form: clean books, a monthly review, and a basic understanding of what the numbers mean are not complicated. But they require a deliberate choice to stop avoiding and start looking.

That choice is available to every business owner, regardless of where they started or what their childhood money story told them.

Connect with Danielle Hayden

Website: https://www.kickstartaccountinginc.com

LinkedIn: https://www.linkedin.com/in/danielle-hayden-kickstartaccounting/

Instagram: @kickstartacct

YouTube: https://www.youtube.com/@CEONumbersNetwork

Podcast: CEO Numbers Network

Email: danielle@kickstartaccountinginc.com

If you have been avoiding your numbers and you know it, this episode is a good place to start.

Frequently Asked Questions

What is the difference between a bookkeeper and an accountant?

A bookkeeper records and categorizes financial transactions and reconciles accounts on a regular basis. An accountant or CPA uses those records to prepare tax returns, financial statements, and reports. The bookkeeper maintains the records. The accountant interprets them for specific purposes, typically at filing time. Most small businesses need both, but they serve distinct functions and should not be expected to substitute for each other.

What does it mean to have clean books?

Clean books means the financial records accurately reflect every transaction in the business. Income is recorded correctly. Expenses are categorized to the right accounts. Bank accounts are reconciled monthly against actual bank statements. Nothing is sitting in uncategorized or miscellaneous accounts. The records are current, typically within the first week of the following month, so the owner always has accurate financial information available.

How often should a small business owner review their financial statements?

Monthly. A meaningful financial review compares the current month's revenue and expenses to the prior month and the prior year, checks the current bank balance, reviews accounts receivable aging, and identifies any significant variances that need explanation. Annual reviews at tax time are not financial management. They are a historical record of what already happened, with no opportunity to act on the information.

What is the difference between cash basis and accrual basis accounting?

Cash basis accounting records revenue when cash is received and expenses when cash is paid. Accrual basis records revenue when it is earned and expenses when they are incurred, regardless of when cash moves. Cash basis is simpler and appropriate for most small service businesses. Accrual basis is more complete but can create significant differences between the P&L and the bank balance. The method matters less than understanding which one you are on and what that means for interpreting your financial statements.

How should a small business owner determine their own compensation?

Start with two questions: what would it cost to hire someone else to do your job, and what does the business generate that is available for owner compensation after operating expenses are covered. The first establishes a floor. The second establishes a ceiling. For S corporation owners, the split between W-2 salary and owner distributions also carries payroll tax implications that affect both the business and the owner's personal tax situation, making this a decision that benefits from input from both a bookkeeper and a tax professional.

Related Reading on Your Profitable Law Firm

If this episode connected with where your firm is right now, these posts go deeper on related topics:

• Why Your Law Firm Needs CFO-Level Thinking, Not Just a Bookkeeper 

• A CFO Reviews a Real Law Firm P&L — Here Is What She Found

• How Attorneys Can Build a Book of Business Without Feeling Like a Sales Person