Are You Financially Literate?

May 1, 2008
According to the American Institute of Certified Public Accountants (AICPA), financial illiteracy is a huge problem in the U.S. AICPA statistics show that 43% of American families spend more than they earn each year, and the trend extends to college graduates struggling to pay back student loans, and high school students who are poorly educated in economic basics.

By Michael Bohinc, CPA

According to the American Institute of Certified Public Accountants (AICPA), financial illiteracy is a huge problem in the U.S. AICPA statistics show that 43% of American families spend more than they earn each year, and the trend extends to college graduates struggling to pay back student loans, and high school students who are poorly educated in economic basics.

Financial literacy is the ability to understand, at a minimum, basic economic terms and concepts, and use them to properly manage the finances of both your business and your family. Financial literacy helps protect individuals (and businesses) from being swindled or being a victim of identity theft. There are stories in the news daily dealing with people who have been victims of financial crimes or whose companies have declared bankruptcy due to financial problems.

Just like staying physically fit, staying “fiscally fit” is a lifestyle change. The promotions out in the marketplace promising you quick fixes and outrageous returns for little or no investment are just like fad diets. They may provide short-term false hope but won’t protect your financial health in the long term. There are no “magic pills” out there that will instantly improve your finances. It takes a lifetime commitment to improve and protect your financial health. You’ll get there by losing a pound or two at a time.

You may look at this as a daunting task. It can be. One way to start is to sit down and review the current financial position of your business and personal finances. For business owners, these typically go hand-in-hand.

The five basic areas that you need to understand to improve your financial literacy are money and income, money management, spending and debt, saving and investing, and risk management.

Money & Income
Money and income are impacted by your education, career choice, and job skills. In general, if you choose to be a teacher or work in the nonprofit field (such as a charity), you can expect to earn much less than if you choose to become a doctor or an attorney. If you’re a comfort technician, additional training (NATE certification, for example) will increase your earnings potential. Business owners can improve the earnings potential of their businesses by taking additional training in financial management and marketing.

In the last 15 years, there have been many associations and membership groups created that focus on the business management side of the company. These groups are helping improve the financial literacy of our industry. These groups include: the Service Roundtable, ACCA MIX Groups, Nexstar Network, International Service Leadership (ISL), and Airtime 500, among others. There are also a number of industry advisors that are working to improve the financial literacy of comfort contractors.

It’s important to understand the sources of income and expenses within your business. It’s also important to know the difference between the gross amount on your pay check and the after-tax earnings on a personal level. You know that if your salary is $100,000, you’re not taking home the full $100,000. There are taxes and other payroll deductions that reduce the amount that you “take home.” Inflation also is a factor in your income as it reduces its’ earning power.

Money Management
Money management means taking accountability for the proper use and protection of your financial resources. One of the first things you can do is to make sure you balance your business and personal checking accounts on a monthly basis. I’m shocked at the number of contractors that don’t do this themselves or have their accountant do it for them on a regular basis. It’s your money, so it’s up to you to keep track of it.

A great way to manage the money is to have a financial plan or budget that acts as a road map for where you want to go. This helps guide you to your financial goals. To reach your financial goals, you must watch what you spend and set aside money for those goals in your plan (i.e., adding a vehicle, buying a building, funding your retirement plan, etc.) You should do this as well on a personal level (buying a house, paying for a child’s college education, early retirement, etc.)

Review the company financial statements (income statement, balance sheet, etc.) on at least a monthly basis. Technology now allows contractors to monitor their financial position on an ongoing basis (by the minute, day, week, etc.) If you’re not doing this on a consistent basis, then you need to start now. How can you adjust your budget for fuel, if you’re not monitoring it on a regular basis? It’s too late to modify your budget and pricing after the fact.

Spending & Debt
If you spend more than the business takes in, you’ll suffer a loss, and the business may be in debt. If your company is failing financially, it will be extremely difficult for you to obtain additional financing unless you have personal funds that you choose to invest in your business. Anytime you borrow money for a purchase, you must make sure that you know how you’ll pay back the borrowed money. If you don’t, then I’d recommend thinking twice before making the purchase. Do you know the best time to go to the bank to borrow money or increase your line of credit? It’s when you don’t need it; when you’re in great financial shape. Many contractors approach their bank when they’re in financial trouble. This is the worst time to talk to them. In 2003, 1.6 million people filed for bankruptcy which is the highest number in history, and twice the number since 1993.

What can you do to improve your spending and debt situation? Pay your bills on time to avoid interest charges. In fact, if the supplier offers a discount, take advantage of that and pay them by the discount date. Review the company’s expenses on a frequent basis. Review your insurance coverage, supplier invoices, utility bills, etc. and see where you may be able to save some money.

Saving & Investing
Saving and investing means that you’re setting money aside and not spending it. In order to invest, you must have some money saved. Any savings you can find on the company expenses will go right to the bottom line (profit). Also, it’s important that you’re properly pricing and charging for the professional services that you provide your customers each day. If you’re not charging enough, you obviously won’t have any money to set aside.

You earn money on the money you invest. Your company and personal savings are not working for you if you leave it sitting in the checking account, or a savings account with a miniscule interest rate. There are a number of safe investment options out there that will put your savings to better use.

One of the things you should be setting aside money for is your company’s retirement plan, for the owner and for all of the employees. Recent surveys show that well over 50% of Americans currently are not saving nearly enough to properly fund their retirement years. If you don’t currently have a plan established, do it right away. There are a number of plan options available so check with your CPA to see which one ‘s right for you.

Risk Management
Risk management means dealing with protection against losses by avoiding them, minimizing them or covering them with insurance. Insurance protects you from major losses in life (key person loss within the company, loss of building, or death.) Personally, it includes loss of home, health problems, or death. It’s important to meet with your insurance advisor on a regular basis to make sure you have the appropriate coverages and limits for both your company and your personal life. Also, doing a regular review of the company’s safety programs will help to minimize the risk of accidents, injuries, and death to the company.

Seek help from your CPA or other financial advisor. Ask questions and be proactive in protecting your financial future. If you’re not taking care of your financial future, then who is?

is a Certified Public Accountant and a licensed HVAC contractor in the State of Ohio. He has 20 years’ experience working on business management issues in the plumbing, heating, and cooling industry. He can be reached at: 440/708-2583 or [email protected]

Some information in this column was provided by the American Institute of Certified Public Accountants (AICPA). For more information on the AICPA Financial Literacy program, go to

The information in this article should not be used as a substitute for consultation with an accounting professional who has all the relevant information to your specific situation. The information in this article is general in nature and may or may not apply to your company’s situation.