May 30, 2014
We often hear how speaking a foreign language is horizon-broadening must. But speaking…accounting? If it sounds counterintuitive, think again. Knowing the basics of debits and credits and how to read your balance sheet, P&L and cash flow statement can make or break your business. Whether you work for a start-up, planning your own online store, manage a team or a business unit with a P&L in a national or multinational company, you need to brush up on your accounting speak.
Because the success of your company depends on it. So what are the ABC’s of accounting speak?
1) Balance Sheet
The Balance sheet is a snapshot at a point in time of what a company owns, or assets and what it owes, or liabilities. The difference is the company net worth, or shareholder’s equity. Assets can include buildings, equipment, furniture, software, intellectual property, cash and money others owe you. Liabilities can include loans, accounts payable and payroll and debts you owe to others.
2) Income Statement (P&L)
The Income Statement shows how your company generates revenue, what the expenses are and what’s the bottom line, or net income. A P&L can be generated daily (e.g. trading desk), weekly (e.g. local grocery store) etc. but usually are developed monthly. A well-structured P&L can highlight your profit generating products or services and underscore your biggest expenses.
3) Cash Flow
According to Dun & Bradstreet Small Business 90% of small businesses fail due to poor cash flow. In other words, too much cash going out and not enough cash coming in. Cash flow is a fundamental financial indicator because cash is king. While you may be showing profits on your P&L if you have no cash flow, you will wither. On the other hand, you may be generating cash but not making profits.
Several online sources and educational provides offer courses in fundamentals of accounting. One thing is for sure: “Having a grasp of basic accounting terminology is fundamental to everyone in leadership of the enterprise” said Miles Hutchinson, a CPA and seasoned Accounting Faculty who led the design of a live online course at the American Management Association “ How to speak Accounting” launching in June 2014.
While accounting and finance have been long considered scary by many not trained in finance, they are increasingly becoming fundamental to daily life and daily business as the bleak memories of the 2008 financial meltdown are pushed in the back of our minds with the exciting new opportunities of looking ahead. So next time you are looking to improve on your foreign language skills, don’t forget accounting!
For more business insights and strategies, sign up for our free management newsletter, Moving Ahead.