Some Entrepreneurs Lack Financial Skills.
By Dr Paul E Adams | November 30, 2002
What would you think of a physician who can't read x-rays or lab reports?
If you can't read and understand your financial score sheets your income statement and balance sheet — the basic money documents of business, entrepreneurship and capitalism — you may be a financial illiterate.
Strong language, but accounting is not the favorite subject of many entrepreneurs.
I know the president of a 5 million dollar company that can't read his financial statements. He looks at the bottom line and gross sales; the rest is just so many accounts and dollars. I know the owner of a home-based business who reads her income statement each month sweating the slim margin between a loss and a meager profit. But don't ask her to analyze it.
If you studied business in college, you may have enjoyed you marketing, management, and advertising courses, but not Accounting 101 (unless it was your major).
Debiting and crediting entries such as postage and cash in those strange looking blackboard T accounts was not a stimulating part of your education. And now in business-perhaps you feel the same. You leave it to your accountant or bookkeeper to take care of all those details while you focus on the exciting parts of your business. After all, did not your management courses teach you to think about the big picture and not get yourself bogged down in detail? Are not successful entrepreneurs those who focus on the future and leave the time-consuming trite to underlings?
Maybe, but trusting the management of your cash, your books, and your financial health to a part time accountant or bookkeeper is sheer lunacy.
Accounting and the grasping of financial reports are not the property of bores, clerks, or Mr. Peepers. They are the manual to operating your enterprise. With that said; how is it many owners do not understand their financial score cards? Simple. They are too busy, too successful, lucky, have too many problems, or don't want to know the bad news, The pressures of running the business, getting customers, pleasing customers, and putting out the usual crop of fires, can leave little time to fret over debits and credits. And if the news is all good, with cash rolling in- who cares about such trivia- just enjoy.
Not wise management. If you are losing money, you need to know it while there is time to launch a lifeboat. If you have found prosperity- your trust and financial ignorance may permit unknown partners to share your cash cow. It is time to put aside your misconceptions of entrepreneurship and learn about the workings of your financial statements.
Why your balance sheet and income statements matter
A balance sheet is a photograph of your company. It is an x-ray of the financial health of your business at that moment. If you view a series of your balance sheets, the changes tell a story. A story of how well your customers pay you, how well your inventory is selling, how much money you have, how much money you owe and even how much equity you have in your business. When you grasp the details you may find the document more interesting than the Sopranos.
Your income statement is a report card of your current progress. It is a simple document. Built around the logic of : sales less the cost of the product you sold — equal your gross profit — less all your expense from salaries to rent equal your net profit of loss. No mystery, just basics. Your income statement signals you about problems and successes. And if you know what to look for, it will show you solutions to your financial problems.
Now that I have badgered you with guilt and fear- what do you do? Take Accounting 101 again?
No! You need a crash course of basics, and your accounting software package can do it for you. Most have short tutorial sections on the basics of double entry booking. After you have gained an understanding of how you statements are created, learn how to analyze the information. Start with basic ratio analysis-if I have lost you, log on to the internet-click on your favorite search engine, and type: Financial Ratio Analysis. Study the information and practice by looking at some financial statements of the many NASDAQ companies posted on the internet. Study a few, make some comparisons, and just get comfortable. Not only will you develop a deeper understanding of the financial management of your business, but who knows, maybe you will discover a stock or two that will give you a bit of excitement.
Editor's note: To learn more about the basics of business accounting, be sure to start with Accounting 101: Balance Sheet Basics.