Entrepreneurs who don’t understand basic accounting concepts are setting themselves up for unnecessary stress and failure, according to Peter Frampton of Color Accounting International.
He adds that the good news is that everyone can learn the basic skills they need.
“Business owners often tell us they’re slightly intimidated when meeting their accountants. They end up saying nothing more than ‘tell me where to sign’ so they can get out as quickly as possible,” says Frampton.
“But with just one day’s training, entrepreneurs can improve their accounting skills to the point where that dreaded quarterly meeting becomes an opportunity for intelligent, constructive conversation about the future of their business.”
According to Marc Johnson of Financial Literacy Express, there’s a very clear correlation between accounting literacy and business success.
“When you understand the basic financial architecture of your business and how funds flow through the value cycle, you can see more options and make better decisions. You might change the products you sell based on what’s most profitable, or negotiate discounts or better payment terms based on your spend with a key supplier,” said Johnson.
Understanding the business value cycle also enables more intelligent planning and forecasting.
“Successful planning takes a lot more than just adding a percentage to all the figures on last year’s spreadsheet. Once you really understand the linkages between equity, income, expenses, assets and liabilities, planning becomes a much more rewarding process,” he says.
For example, if you have a profit target in mind, and know what profit margins in your industry are, that gives you a revenue target.”
He says it’s fairly easy to work out the direct cost of sales from there, but what about indirect costs? And what will that mean for your assets? When will you need to hire a new staff member, or buy a new vehicle, or get bigger offices? And how will that new asset structure be financed?
Seeing these linkages not only enables better planning, says Johnson, it protects entrepreneurs from bad decisions.
“When we’re stressed, our vision narrows. But when we can see a system as an organic whole, we also see a lot more options. When there’s a cash flow crisis, for example, there are plenty of ways to ride it out if you can see clearly,” he explains.
“Perhaps you could pay your taxes later and accept a penalty, or run down your inventory, or retrench a staff member. The key point is that you won’t see these options if your accounting literacy isn’t up to scratch.”
Frampton says success is about working smarter, not necessarily harder.
This article was written by Marc Johnson of Financial Literacy Express (South Africa) and Peter Frampton of Color Accounting International.