Understanding Accounting & Finance, Part 1 – Introduction.

Some industries make use of lots of technical terms, and accounting and finance is one of the main culprits, it’s up there with IT.

Whilst you may be able to get away with not understanding a lot of the technical jargon (especially where computers are concerned) when running a business, accounting and finance is an area where it is worth getting to grips with the basics, and then some.

It doesn’t mean you need to be an expert, after all, that’s what you pay your finance team, a bookkeeper or an accountant for; what it does mean is that you are aware of what is going on.

Most business owners and CEOs are experts in a particular field, which generally won’t be accounting (unless you are in running a business in the finance and accounting sector), and it is natural to spend most of your time on the part, or parts of the business that you know and are passionate about.

You want to see the numbers, but are not really bothered how they are created; you trust that they are accurate, and all you are really interested in is if the business is making money and if not, where to cut costs.

Your business accounts can tell you so much more than this, so it is worth investing your time, as well as some money in making sure it is done properly, and that you are keeping an eye on it; after all, you wouldn’t leave your sales team to their own devices, would you?

Unfortunately, some accountants and finance experts are not as good at their job as they should be; I have seen some shocking things in my time, and the one common factor was that the CEO or business owner was blissfully unaware that there were corners being cut, and that the figures they were being presented with were inaccurate.

It is a common mistake to just let people ‘get on with it’, trusting that they will do a good job.

There can be a number of reasons why problems occur and corners are cut; 

  • Some finance managers and accountants can be too overloaded with work to do a good job, 
  • They may not have the right resources,
  • They can feel too embarrassed to ask for help, 
  • The information they are given can be a mess that needs decoding (I have seen some business owners dump a pile of papers and receipts on their accountants desk, and expect them to create perfect accounts), 
  • They are not very good at their job,
  • It can be an ego trip and used to purposefully belittle others and make people feel uncomfortable.

“Don’t be afraid that you don’t know. Be afraid that you aren’t learning.”

Chinese Proverb

Having a basic knowledge of accounting documents such as the Profit and Loss, and a Balance Sheet, will give you an extra edge as a business owner or a CEO; you can sit in meetings and pretend that you know what the numbers are saying, and trust they are accurate, but if things go wrong, and the proverbial hits the fan, then there is only one person to blame, and that is yourself, because at the end of the day the running of the business is your responsibility.

One of my clients was really proactive, and asked me for help in understanding the accounts better, so I created a list of definitions for her, and we sat together and went through the accounts.  Once we had done this, she felt more confident and in control of what was happening in the business, and most importantly, where it was financially.

As I said, it’s not about being an expert, after all, you will have so many hats to wear when running a business, that it’s an impossible task; it’s about knowing when things don’t look quiet right, and challenging these things by asking questions;

  • Where did you take the figures for this from?
  • Why has this figure suddenly dropped?
  • I don’t understand your explanations, can you simplify them for me?

“You have to know accounting. It’s the language of modern business life.”

Charlie Munger

Some accountants and finance experts can get too caught up in the ‘bullshit’ (pardon my language) in the hope that it shows how clever they are, and sometimes to try and make themselves indispensable (I have seen finance managers use processes that are so complex that they are the only ones who know how to use them); worst of all, some can use it to cover illegal activity.

For me, the accounting and finance procedures should be simple and clear, if you are replacing a member of your finance team, or changing accountants, the handover should be seamless.  When I started with a particular client, everything was in such a mess that it took six months to figure out and fix what the previous finance manager had done.

I am going to be publishing a series of blogs and videos that will go through all of the key accounting documents, and give definitions for all of the terminology used; along the way, I will be highlighting areas that you should keep an eye on.

With this information, you will feel more confident, and in control.

Published by Kim Masters

Kim is a South African living in Bedfordshire. She specialises in helping businesses and individuals with their finances, combining her 25 years of accounting experience with her passion for healing therapies.

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