Business owners and CEOs of small and medium size companies need to be at least bi-lingual to succeed in today’s information rich environment. They need to speak their regular native language – English in most of the U.S. and Canada, and the second language they should know is ACCOUNTING – the language of finance.
Yes, that’s right Accounting is a language. It’s also a system for keeping track of numerous facts and conditions and a method of reporting specific business performance results. More than knowing where to find the bottom-line on an income statement, it’s important for business owners and senior executives, to fully understand their own business the way others not in their business see and evaluate it.
Bankers, investors, vendors, employees and customers, while not the entrepreneur like the company owner; they still use common methods for evaluating the financial condition, risk profile, historic performance, and attractiveness of your company. The language they use to articulate those evaluations are based on well-established accounting principles. For business owners a working knowledge of Managerial Accounting is important to their success.
Understanding important accounting concepts such as working capital, accrual vs. cash basis accounting, leverage, the cash conversion cycle, EBITDA, CAGR, IRR, and capital structure, just to name a few, will help to avoid creating financial know-how blind spots. These blind spots exist when business owners lack the awareness and appreciation of the essential value of certain financial dynamics that are at work every day in their companies.
If you are a business owner, or CEO of a small or medium size company, by having a solid grasp of accounting principles, you will be better equipped to deal with your bankers, investors, and customers. If you have a working familiarity with key financial ratios and their significance in your business, you’ll be able to speak with more authority, and understand more fully, discussions with these same people and not feel like they are speaking a foreign language. And they will appreciate that you speak their language too. They’ll know you “Get it.”
If you find that you are not looking for those key accounting reports, results and metrics, that are commonly contained in your company’s managerial accounting reports, on a weekly, monthly, or quarterly basis, as well as year-end statements, or if you don’t have someone who does that for you, then you are missing some very essential and revealing information about your own company. Managing and focusing on key financial results, the details of which are made clear through accounting reports, is a fundamental skill set for modern business executives. Don’t be caught unable to speak the language of finance. Ask your CPA or banker to help identify worthwhile reading material or courses available in your community. Once you have grasped the important principles you’ll be surprised at how much better you’ll understand your own business.