3 Reasons to Know Basic Accounting

You don’t have to like accounting, but you should know basic accounting to operate a profitable business. Before you fight this too hard, consider three reasons.

Where Have I Been?

Let me ask you a few questions. Have you ever driven somewhere and when you got there suddenly realized you have little recollection of the trip? It happens to all of us at some point as we get lost in thought. Another variation that happens is for a driver to suddenly realize they have been driving on auto-pilot, look around and realize they are not sure where they are. Scary, isn’t it? No wonder we have so many wrecks. But in the business world something similar happens.

In a sense accounting serves as both a map and a memory aid. When you have a basic understanding of the numbers of your business and have regular financial reports to review, then you have a way to refresh your memory of company activities. This information gives you two key pieces of information.

  • You know where you are at this point in time
  • You have a record of how you got there

Why does that matter? If you know where you are and how you got there you can identify where you have over-spent, where sales are lagging, who are the customers causing cash problems, what specific items on your balance sheet or income statement are out of line, etc. With this knowledge you can take corrective action such as connecting with delinquent customers, reducing excess inventory, and identifying products and services that either need a stronger sales and market effort or perhaps should be discontinued. These are just examples, but once you get familiar with the financial reports and make it a habit to review them frequently, you will be surprised at how often something stands out as an area to investigate further.

Where Am I Going?

Once you see where you are and how you got there, you have a tremendous opportunity to impact the future of your company. Although there are no guaranteed results, it does improve your odds of success if you have a simple plan (in a sense a map) for how you will proceed. Suppose you identified that one of the main drags on your company’s cash is excessive inventory. Just knowing that give you something to work on going forward. Wouldn’t it be helpful to have a plan to navigate around this problem in the future? Knowing what items are stocked in excess allows you to develop a way to reduce this excess. Additionally, you have the opportunity to set in place policies and procedures to prevent this excess from occurring again with any products. Likewise, if you now know that certain customers are always slow to pay, then you can make it a practice to stay in regular and frequent contact with them to avoid on-going slow payment. Perhaps they are not satisfied with something and are using this as a reason not to pay on time. Are they experiencing cash flow problems? It can be any number of reasons, but unless you investigate you are flying blind and will continue to face the same problems. If you want to manage profits and cash flow effectively, then you must know how to manage your assets. See Cash Management -It’s Not About the Cash Account

Regardless of the underlying issues, understanding basic accounting will help greatly in planning your next steps as you seek to improve the performance of the company.

Intelligent Conversation

I’ve had some times in the past where I witnessed a company’s top management say or write things that clearly demonstrated they did not have a grasp on the financial aspects of their business.

One of these involved a struggling distributor who was negotiating with key suppliers to keep product coming while at the same time addressing how to pay the past due amounts to these suppliers. It was clear from observing this that these managers had very little understanding of just what the condition of the company was or how it had gotten to where it was. This lack of comprehension prevented useful conversations with their suppliers. This also carried over into negotiations for a bank line of credit. In both cases it made them look like they had little understanding of their company.

In another case I was reading over some of the information being provided for an annual report. Remember that investors rely on the information in annual and quarterly reports when making investment decisions. To make a long story short, as I read the information I realized that what was being said had very little correlation to reality. You think that might be a problem? Of course you do.

In both of these cases the key element missing was an understanding of basic accounting and willingness to learn how to read financial information and form reasonable conclusions from it.

Do the managers in your company have at least a fundamental understanding of accounting? They don’t need to know how to keep accounting records. They really just need to understand what the numbers represent and are telling them. It is also helpful to at least have some idea of how numbers interact and what results can be expected with specific actions. As they say, “This is not rocket science.” It is well within the grasp of most managers.

Need help with this concept? AimCFO is here for you.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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