We grew up thinking that good behavior is rewarded. Current events can really rock that thinking. But it’s been proven that good organizational behavior, also known as an ethical culture, can result in financial success. Yes, the Good Guy really can win by running an organization in an ethical manner.
In fact, a February 2016, Forbes.com article, The Profit Potential in Running An Ethical Business by @SteveParrish4, says that an ethical business is easier to manage than an organization with disdain for rules and disrespect for accountability. As Mr. Parrish says, keeping a second set of accounting records is time consuming and expensive. Fraud losses and prosecutions can get expensive, too. Just ask the former employees and shareholders of Enron, WorldCom, etc., etc.
An ethical culture starts with that proverbial “tone at the top” set by leadership – the Board, CEO, and CFO. Tone at the top sets the organization’s guiding values. So how does ethical culture happen?
Leadership takes four actions to establish the right tone at the top to promote an ethical culture and drive financial success:
- Communicate expectations.Organizations must make it clear that unethical conduct will not be tolerated. Clear and convincing policies should convey the organization’s values and expected behaviors. A first step is to establish a written code of ethics and ethics training.
- Lead by example.Leadership must set an example through its actions. Observing leadership actively following the organization’s code of ethics increases the likelihood that it will be followed by others. Leadership must also be mindful of perception, and understand how their actions could be interpreted.
- Recognize integrity.Support an ethical culture by recognizing individuals for ethical behavior. Recognition could be a monetary incentive program, or some other special acknowledgement from leadership. Whatever the reward, publicly celebrate the behavior and clearly communicate the link between ethical behavior and the reward.
- Establish confidential reporting.No matter what leadership does to promote an ethical culture, some individuals will still engage in unethical, or even illegal, activities. Establish a confidential tip line or other mechanism for reporting real or suspected fraudulent behavior or ethical violations without fear of retaliation. Set up a mechanism to follow-up on tips.
These actions alone do not guarantee that everyone in the organization will act in an ethical manner, but they can go a long way to setting an ethical culture and driving financial success.
Workshops are a great way to share information that organizations can use immediately. Last week, I got an opportunity to speak with a room of entrepreneurs about three essential elements for a financially healthy organization.
Financial Essentials for Entrepreneurs covered three elements that must be in place for every organization:
- Financial Accounts
A separate financial account should be maintained for each business or nonprofit. It’s never too early to open a separate bank account. Each separate and distinct business should also get its own credit card to assist with payments and cash flow. Comingling personal and organizational funds presents a risk of not getting a clear, isolated view of business finances.
- Accounting Records
Accounting records should be kept for each organization to substantiate income and expenses. Keep those records up-to-date. You never know when something unexpected will come up. How would you know if you can afford it? Capture the date, amount, business purpose, and income/expense type using a method to that you can keep up with – or hire a professional to do it for you.
- Tax Compliance
Organizations must be properly registered the with the state, county, and local level, as applicable. Many counties and local jurisdictions have business property tax requirements. Employees? Got to pay employment taxes. Sales tax could also apply. Then, of course, is tax on net income for federal and state (depending on where you live or operate).
Up-to-date, clear financial information helps organizations stay ready to make an investment or decision. Bottom line, addressing the three essential elements described above are as good as “an apple a day” to keep your organization in good financial health.
I often open my workshops with the question: “How many of you started your business to keep the accounting records?” Funny thing; no one ever raises her or his hand. Can it be that people start a business to engage their passion and serve customers?
Last week at the Whole World Workshop for health and wellness practitioners, I got the usual response to that question. No hands, but several chuckles. At that point, everyone was relaxed and ready for my presentation about Finance Fundamentals.
My presentation focused on four essentials for a healthy business:
- Separate Business and Personal Finances
The risks of commingling funds are a negative impact on your personal credit and cash flow and an inability to get a clear, isolated view of business finances. It’s never too early to open a separate business bank account, one for each separate and distinct business. Also, apply for a business credit card to help with payments and cash flow.
- Keep Up-to-Date Accounting Records
Keeping up-to-date records means you always know your financial situation. Separate accounting records should be kept for each business to substantiate income and expenses. No particular record keeping method is required – accounting package or spreadsheets – to capture the date, amount, business purpose, and income/expense type.
- Develop Budget and Cash Flow
Use income from existing sales and vendor contracts, leases, and historical data to develop an annual budget. Identify operating expenses by category. Remember seasonal and one-time items. Include plans for investment and growth. Project cash flow needs for 12-to-18 months based on when payments are due to make sure bills are covered.
- Track Financial Performance
Prepare and review a monthly bank reconciliation, income statement (i.e., P & L) and balance sheet. Compare actuals with budgeted income and expenses to identify where your plans need adjusting. Assess cash flow inflows and outflows to make sure you keep enough funds on-hand to meet expense obligations.
Maintaining a healthy business means keeping it “alive” and ready to deliver its products or services. The four essentials described above are as good as “an apple a day” to keep your business in good financial health.