Why you need to know accounting: Tools for businesses

organizedMany people think that they should just leave accounting to the accountants. After all, you can always hire an accountant.

In fact, every person in business should know and understand accounting because it is the very language of business. Doing business without understanding accounting is like trying to fix your car without tools,  going to France without knowing French (and without a guidebook), or using a cell phone without a battery, or going to New Jersey without an automobile. It just won’t work.

If you are going to do business, you need to understand what a balance sheet is. What an income statement is. How profits are calculated. What assets are. How taxes are calculated. How to manage cash flow.

This is not to say that you need to keep your own books, or that you should be your accountant. That might not be the best use of your time. Rather, it’s perfectly fine to hire competent people and then be conversant in accounting. Understand the language and the principles.

I am reminded of a wheeler-dealer client who had quickly built up a good-sized business, with well over a $100,000 in sales. However, his bookkeeping was limited to handwritten receipts (from Staples) and boxes and boxes of various slips of paper. It was a seemingly impossible task to try to get everything into order so that income taxes could be computed. Worse, yet, this particular client didn’t seem to have any idea what was going on. What were his sales? Profitability? How much inventory did he have? Accounting provides a simple way to keep all of this information organized and a language in which to communicate it.

[Image: organized by ripkas, on Flickr]

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