Is your business thriving? Or is it just getting by? Do you have a clear insight into where your business is going? If you want to do well in business, you must pay attention to your numbers. Business is a numbers game, and your numbers are telling you a story, so you need to pay close attention to it.
There is a fable commonly used when it comes to keeping track of the results of your
business.
Imagine you are on a plane and the pilot announces there is good news and bad news. The bad news is that the navigation system’s broken and nobody has any idea of what direction the plane is flying or where you are headed. At the same time, the altimeter and artificial horizon have shut down. There’s no way to tell how high the plane is or even if it is going up or down.
Panic ensues when the pilot announces calmly that there is also some good news: the speed indicator is working just fine and the plane is making great time!
In this story, as in your own business, you will understand that at times, you can be travelling at lightspeed in one direction, without really knowing whether it is indeed the right thing to do.
It’s easy to get carried away with big orders or big promises from our customers or suppliers. You see new machinery or shiny apps and tools that you can use and rush to put them into your businesses. Then you get carried in all sorts of directions but still feel like you’re doing great things and building a great business.
Then your accountant steps in. They explain you didn’t make as much profit as you thought, that you are running out of cash and that you owe the tax office and your suppliers a lot of money. At this stage, you’ll find yourself questioning whether all that ground covered was actually worth it.
You can understand that given the tendency for forces to pull our businesses in many
different directions, it makes sense to have a clear path set for what you want your business to do and by when. You then need to break that down into what it means for profits as well as for cash flow.
This is where a basic knowledge of accounting comes in very handy for all business owners.
Warren Buffett, arguably the world’s greatest and most successful investor, famously
remarked that “Accounting is the Language of Business”. What he meant was that if you are
in business or want to invest in a business, you had better learn to speak the language that the business operates on.
When you have at least a basic understanding of accounting, you won’t have to rely on the interpretation of others to keep you informed about what is happening day to day.
Not knowing your numbers can play against you in a couple of ways. As an accountant with over 25 years of experience across a range of industries and businesses, I have all too often seen businesses that made good profits and settled for that. The thing was, they could have just as easily made great profits. They just failed to look in-depth at their numbers.
I have also seen businesses settle for neutral cash flow and so they can keep themselves and their staff in jobs, despite there being very little in terms of profits or growth.
What’s common with both these types of businesses is that they will often fail to survive a change in their industry or a downturn in the economy. They will also find themselves a target for acquisition from a competitor who goes on to add much more value to the business than the previous owner could have done.
The business owners I have described are typically very deeply knowledgeable in their industry but they have failed to take a look much beyond it. As a result, they are never really rewarded for their efforts.
When you have an understanding of accounting basics, you’ll be equipped with the power to set your direction and follow it. As a result, your business will have the best chance of achieving its true potential and becoming a valuable asset to build your own personal wealth.
Written by Scott Trevethan
Scott Trevethan is an author and Chartered Accountant with over 25 years of experience across a range of businesses and industries. He currently runs Financial Fanatics, which provides expert offshore financial professionals to business owners, accounting firms and bookkeeping firms. Find out more at www.financialfanatics.com
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