I began to contemplate managing my business and realized I needed to acquire lots of knowledge. Of all the skills and knowledge one should have, accounting appeared to be very crucial. It is not just about keeping records of money but understanding how healthy the finances of your business are. If you lack a grip on accounting, it’s hard not to be left behind and make costly mistakes.
Initially, it seemed like I could hire an accountant who would take care of all the financial stuff for me. As much as this may be true that having a competent accountant is priceless; I came to realize that I couldn’t surrender everything to them. I had to understand their language. For any relationship communication is very important especially between a business owner and his or her accountant. Without knowing anything about accounting, asking those questions or making some judgments based on their advice was out of question.
Sourced
One of the most enlightening things I’ve ever learned is that profit and cash flow are different. Initially, I assumed that provided my business was making a profit, all would be well. But this has not always been true. Profit matters but doesn’t complete the story. You can have a business which looks good on paper, but it could still experience serious problems if it has a negative cash flow. Cash flow is the real money going in and out of your company. It is possible to be profitable yet your firm will still have cash flow issues that may put its survival at risk.
I recall for example looking at my financial statements and being puzzled. According to the accountant, my business was doing well because we were profitable but I couldn’t understand why our cash levels were diminishing. After some discussions and learning, I discovered that even though we made sales and earned profits, we weren’t receiving money quickly enough to cover our costs.Some customers took a long time before paying their invoices leading to a situation where there was a gap between our profits and our available cash. This was an important lesson which underscored how managing both profits and cash flows needs attention.
My ability to make better strategic decisions is also enhanced by understanding accounting. Whenever I consider expanding my business or tapping into new markets, I must be cognizant of the impacts that these choices will have on my liquidity position. I cannot rely on mere intuition or superficial calculations alone. I must delve deeper into the facts, know all my costs, estimate future revenues and determine how they would affect the general financial situation of my organization. This level of comprehension enables me to trust in the accuracy and validity of what I choose to do.
Understanding accounting principles further enables me spot problems in their early stages. By examining my financial statements regularly and knowing what indicators to look for, I can catch them before they become big issues. By having an accurate picture of accounting; it allows me to take deliberate measures in dealing with such challenges as unusual increase in expenditures, fall in sales volume or cash flow difficulties.
Sourced
Although it is wise to employ an accountant, this alone is insufficient. For me as a person who runs the business, I should have some knowledge of accounting to assist me in managing my company effectively. This understanding consequently allows one to establish good communication with their accountant. It also enables rational decision making and ensures the wellbeing of my establishment’s financial state. It isn’t all about numbers but understanding what those numbers give away about my business.By practicing these precepts, I can be more effective in managing and directing a complex enterprise towards success.