Owners and executives ought to be financially literate to run and grow their companies. For those whose knowledge is lacking, help is available.

Great CEOs know their businesses inside and out, and that includes understanding the financials. Alas, not everyone's a natural number cruncher. In a survey conducted by the Business Literacy Institute, the average business owner/executive scored just 38 percent on tests of financial literacy. A majority couldn't distinguish profit from cash, while roughly 70 percent picked an incorrect definition of "free cash flow."

A company's top officer should be well-versed in everything from mergers and acquisitions to executive compensation. Yet, for those without sufficient knowledge, the prospect might seem daunting. Seeking a primer? Begin with cash flow.

"Cash is king," says Eric Stewart, president and partner of Vanguard Wines. "We have to focus on inventory management. We have to focus on very simple fundamentals in business with payables to our suppliers, because we choose to have long-term partnerships."

"They really have to have their arms around their balance sheet and cash flow. It's absolutely critical, regardless of size," says C. Daniel DeLawder, chairman and CEO of Park National Bank. "You really have to manage your inventory. Inventory and receivables tie up your cash. Cash is really king. You have to have it to operate and pay your bills. Maintaining appropriate levels of inventory and receivables is critical to balancing cash needs."

At the end of the day, it's the CEO or owner's job to create value. Keeping tabs on cash flow is a huge part of that job responsibility. "Value creation for the company always has to be on the mind of the CEO. How am I going to build my business? How am I going to create more value for my shareholders in terms of earnings per share and in terms of quarterly dividends?" says attorney Ted Motheral, an associate in the corporate and securities practice group at Benesch, Friedlander, Coplan & Aronoff.

"At the heart of creating value for shareholders is maximizing cash flow," Motheral says. "Cash flow will create less leveraging of a company. It will create more internal growth, so that you can bring in more talent from an employee standpoint. It can build your company from within instead of creating a debt-to-equity ratio that might hurt your company in the future."

Businesses of all sizes should keep a constant eye on their cash flow, says Michael Bowers, regional director of the Ohio Small Business Development Center at Columbus State Community College. "Cash is the lifeblood of a business. As small business owners, sometimes that's even more important because that's what you have to pay the bills with. I've seen a number of businesses in the past that have focused on revenue, top line sales or profitability, but the way they did business with invoicing and accounts receivable meant that they didn't have enough cash to continue."

Key Documents

A great way for a CEO or small business owner to stay on top of the company's cash flow and corporate finances is to keep tabs on a few vital documents. What you look at every day might depend on how large your company is, Motheral says. "If you're in a huge company and you can look at profit and loss statements and a statement of cash flow for the day, and see what your revenues and profits are and see what your expenses are and get the bottom line, that's fantastic. If you're a smaller business, you have to look at those core financial documents--your balance sheet, your statement of cash flow and your profit and loss."

Receivables show where cash is tied up. "If you're getting paid 90 days out instead of 30 days, the use of those two months is pretty critical and can make a huge difference," says attorney Thomas Washbush, partner-in-charge of Benesch's Columbus office.

"You could be very financially healthy and doing a lot of business, but if you have a 90-day term on when you get paid you could be very cash poor. That might really hamper your operations," Motheral says.

Understanding the entities you're doing business with is a key component for handling receivables, says Mark Swepston, president of Atlas Butler Heating & Cooling. "You've got to know the average collection time on those funds and then how much money you're going to have invested in your own people and operations before you get a chance to collect the money," he says.

Owners should have a "dashboard report" that includes daily cash balances and profitability. Once they break down the business and understand daily overhead costs, it's easier to know the sales and margins needed to cover it, Swepston says.

Atlas Butler has a daily profitability report organized by department. "Some service parts of it are estimated, because you don't know every minute what an expense is going to be. Over time, you can make a very well-educated guess and we use historical information as much as possible," Swepston says.

The HVAC company also keeps a daily tab on cash balance, receivables and billing. "I now actually review that about weekly, but we have a controller that keeps it updated every day," he says.

Watching those figures on a regular basis is not only important for current financial health, but also for future growth. "If a business is looking to get financing, or maybe seek financing down the road, they really need to focus on the financial performance. Banks will look at those financial and tax returns," Bowers says. "If you've got poor financial performance in the past, financial institutions will often pass on the business. All of a sudden, you can't deliver a service because you can't get the financing to support it."

Without the CFO

Getting a handle on the balance sheet is critical, but CEOs should also possess more in-depth knowledge for occasions when the CFO isn't in the room. "As a CEO, you almost have to have that part of your skill set where you know what your CFO would be thinking if he were there in order to run your company appropriately," Motheral says.

Creating a good relationship with the CFO and financial staff is also important. "It means looking at the business from a strategic perspective, understanding where it is today and understanding where it's going," says Jim Malz, manager of middle market business in Ohio for JPMorgan Chase & Company. "The CEO should be a part of the discussions with the finance staff about how they will get there and the strategic planning on how it relates to the needs from a financial perspective. He or she really needs to be plugged in and really understand financial instruments to help the business grow, expand and succeed."

In the case of a merger or acquisition, clients often see only two options for their company--own it or sell it. "There are a lot of options and a lot of variations of that," Washbush says. "We put together stockholder agreements all the time that give certain liquidity rights and preference rights and things like that. All of that has a financial impact on the company, which you better understand."

Understanding debt structure is also important, whether financing comes from a traditional bank, an angel investor, asset-based or mezzanine lenders or another source. "[CEOs should] really keep a handle on how that works and what kind of interest and whether you should have a swap agreement in place or not. None of that is the operation of the company, but it can have a significant impact on whether or not the company is profitable," Washbush says.

Executive Compensation

CEOs should understand more about how employees are compensated than simply knowing when payday is. They also should be engaged in finding the right people for the company, as well as the right way to pay and energize those people. "Are you motivating them in a way that maximizes shareholder value, which means having the right ratio of compensation to revenue generated? Maybe that's purely cash, an option plan or some kind of stock-option plan," Washbush says.

"It's a great way for a startup company to say, ‘I'll give you X amount now, but we want to keep you around. You're talented. We like you. So, we're going to give you a future incentive down the road if the company is successful,' " Motheral says.

Understanding the company's personnel can help executives fix problems quickly, Malz says. "Know who does what, not just on the finance side, but the entire business, including clarity of roles and responsibilities in terms of internal reporting points. Feedback can be elevated and suggestions elevated from the bottom up to help the company expand. ‘Problems don't age well' is the old saying."

"If you can create an issue in an hour, it probably takes a month to repair it," Vanguard's Stewart agrees. "You have to be intimately aware of finances and how the company is operating day to day. If you're negligent, things can get out of hand rather quickly."

In the end, it might be more about asking the right questions than having all the answers. "I don't think we're saying everybody has to have a finance degree and 20 years of finance experience. You're kind of a jack-of-all-trades as a CEO, and one pretty strong component of that ought to be financial knowledge," Washbush says.

"Sometimes you just need to know the right questions to ask in terms of the financial health of your company and in terms of the impact that these things we've mapped out are going to have on the company from a short- and long-term standpoint," Motheral says.

Small Biz Owners

While the CEOs of large companies might look to their CFOs to become more knowledgeable in corporate finance, a small business owner is often on his or her own. "Most small business owners are the CFO, whether they like to call themselves that or not," Swepston says.

Swepston, who is often approached by other small business owners seeking advice, sees entrepreneurs who are passionate about their business, but have never considered financing or cash flow. "It's not second nature for them. It takes a lot of study, a lot of time, a lot of experience and a lot of trial and error to really get good at knowing and understanding what they've got to do," he says.

Bowers agrees. "It's really not uncommon at all. Most people get into a small business or start a small business because they have a passion about what they do," he says. "For small business owners, it's important that they focus in on these non-operational, non-product aspects, too, so that they can blend the mission and the margin."

Owners with a small or nonexistent finance staff need to understand the accounting system in order to input revenue and expenses correctly. "A lot of times, small business owners are focusing on running the business, generating sales, delivering the product or service, and this data input doesn't happen in a timely fashion," Bowers says. "Sometimes it's garbage in and garbage out, so you don't know where you are as a business. It's critical to monitor where you are versus any sort of budgeting that you've done."

Often the biggest mistake small business owners make, particularly when they're first starting out, is devaluing their own services, Swepston says. Take, for example, an advertising agent who makes $75,000 a year at a large agency and decides to open his own boutique. Should he take that salary automatically?

Small business owners "may not take the cash, because cash flow in their organizations may not be there. But when they set up their pricing, do they establish enough value for their time? ... What I find in a lot of cases is that people take the profit and consider the profit part of their compensation, when they really need to separate the two," Swepston says. Entrepreneurs might not realize they're losing money for years, or even decades.

"There's not much room for error, especially in difficult times. If you're not watching your finances, the possibility to not be able to make payroll, not be able to pay bills and possibly go out of business is greatly increased," Bowers says.

Gaining Knowledge

Aside from tapping the CFO and financial staff for advice, execs and owners can become more financially literate in more formal ways. Higher education can be a valuable asset, but that may not viable for many business owners, says Swepston, who earned a bachelor's degree in finance from Ohio State University.

Trade and professional associations also offer classes. Swepston has taken financing courses from the Air Conditioning Contractors of America, including one on how to price products properly. "You can go to an association meeting, maybe a national meeting so you're not necessarily working directly with the competitor, and go to classes," he says.

Atlas Butler maintains contact with a few similar-size noncompeting small businesses to compare notes. "We've got a lot of commonalities, so we can see how we keep on track with different things-line item costs like advertising or auto and truck expenses or insurance," Swepston says.

Park National Bank also compares itself to other businesses to stay on the right financial path. "We like to look at successful companies and copy them, and we're not bashful about doing it," DeLawder says. "We see what works for them and implement that. Following best practices, typically through a trade association, is highly advisable."

Small business owners should be careful if they decide to seek out finance courses, Bowers says. "I would be looking for classes that focus on entrepreneurship in the financial systems, as opposed to going back to take an accounting class. There are classes at a number of colleges and universities in the area that talk about how you need to be running a business, and the financial part of the business is oftentimes a part of that." The SBDC also offers free, one-on-one business consulting and advising.

Executives with more resources might decide to earn an MBA, or take intensive executive courses at the likes of Harvard or Duke University, Washbush says. Networking can also be a good resource. "There are groups in this town and every other town where you're talking to other CEOs, and I think you learn from them," he says.

Another way to bump up your financial literacy is to surround yourself with trusted advisors. "One would be the external accounting firm that's available to the company," DeLawder says. "That's a great resource."

A trusted banker, or a team of bankers, who know and understand the company's strengths and weaknesses is another. "Companies have to distinguish themselves in so many ways, and the best way is to have good, engaged relationships with bankers who they can speak with about anything going on in their business or the financial services industry," Malz says.

Also important is legal advice, ranging from M&A to general business counsel. "We will get involved in whether it makes sense to shed a particular division, or looking at a potential acquisition," Washbush says. "I would say we spend a good part of our time giving advice that is quasi-legal, but is as much business advice as anything else. ... There are folks who really get it and folks who don't get it at all. You want people who at least recognize their shortcomings and lean on other people for help and learn as they go on."

Michelle Davey is an editorial assistant for Columbus C.E.O.

Reprinted from the November 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.