Warren Buffett is credited with coining the phrase “accounting is the language of business.” And he couldn’t be any more right. The easiest way to tell the health of a business is by reading their financial statements.
Why is Accounting the language of business?
Accounting shows you what has happened historically to a business.
The language of Accounting is universal. While some countries account for items differently; financial statements mean relativity the same thing anywhere in the world.
Why is Accounting important?
Every business requires Accounting. It’s easy to go into business and start selling your product or services. But how do you know if you’re actually making money? Accounting.
Unfortunately, too many small business owners don’t understand accounting. Which puts the longevity of their business at risk.
Have you ever meet a business owner whose business appears to be doing well but they just can’t seem to make ends meet? There is a business issue that can be resolved by looking at the financial statements.
I have met business owners who didn’t know what an income statement was. Couldn’t read a bank statement and had no idea how much their products actually cost them to make.
Creativity, ingenuity, passion, and drive will only take you so far unless you understand the language of business known as accounting.
The bottom line
Often times, business owners get so wrapped up in trying to grow the revenue side of things that they totally forget to take a look at the bottom line.
Revenue – Expenses = Net Income (aka the bottom line).
Net Income and cash flow are the real numbers that you need to be concerned with as a business owner.
Just like with your personal bank account you can’t spend more than you make. However, business owners often forget that this same rule applies to their business.
Monthly checkup
Every month you should be looking at your Balance Sheet, Income Statement, and Cash Flow Statement.
These statements will provide you with a roadmap of where you have been. Showing you how much you’ve brought in, spent, and retained.
You then will use the numbers as a framework to make financial decisions to determine where your company should be headed.
- What does the future look like?
- How will you get there?
- How will it be funded?