Why Everyone Should Be an Accountant

Accounting may be boring (to most) but it is quite essential to run a successful business. I have a lot of friends who come to me with fun and exciting business ideas. A lot of them aren't half bad...but there's always one key issue: they don't understand the accounting. Moreover, they think the accounting is only important for taxes and the IRS. But the way you account for your business is key to its survival.

Of course you can hire an accountant, but in the infancy stages of a business most people don't have the luxury of being able to afford someone that official. Furthermore, it's your business...good or bad accounting can make or break it...do you really want to put all of that responsibility in someone else's hands or would you rather know yourself?

I ran across an article in the NYTimes, Basics of Accounting Are Vital to Survival for Entrepreneurs and thought the key points would be great to share with you all. The article shares that you don't have to be a CPA to run a successful business, but there are a few key financial indicators you should understand and pay close attention to in order to measure how successful your business is doing:

1. "Don't Mistake Debt for Profit" - Cash flow is king. When I look at a company's balance sheet and their ratio of cash to debt is 1:2 instead of 2:1...I smell liquidity problems. It's awesome to have cash sitting in the bank, but if all of that cash is money you borrowed, you're just as bad off, if not worse, than if you had $0 in cash and $0 in debt. At least then, you'd be painting an honest picture for yourself...and you wouldn't owe anyone!
2. "Manage Receivables" - This is a major point I always tell my friends. Receivables (money owed to you for services already rendered) are an asset (aka a good thing). However, receivables are only good if the customers actually pay you (thus converting the receivable into cash...again CASH IS KING). A lot of poorly managed businesses will reveal high receivables that have been sitting (aging) for months. The longer it takes someone to pay you, the less likely they are to actually do it. Common sense right? Therefore, if you have $100,000 of receivables on your balance sheet, but $90,000 of them have been there for 3 months or more...chances are you will never see that $90k. With receivables you have to make sure you keep track of who owes you (don't let them buy more until they pay up!), have a collections process in place (don't just let customers sit there owing, call them every day/week/month until they pay), and know what you should be writing off (you want to make sure the picture you're painting is accurate).
3. "Understand Your Expenses" - Your bottom line (net income) is what matters. Don't get so caught up on sales, that you forget what you spent to make those sales happen. If you sell $50k but you spent $45k doing it, that isn't so good. This is why when Kandi of Real Housewives of Atlanta was going on and on about her new sex toy business selling out everywhere, I was unimpressed....don't get me wrong, I love Kandi, but her reiterating that the toys were selling out says little about how the actual business is doing. Who cares how much you sold, how much did you actually make from those sales?! I digress...
4. "Track Your Breakeven" - If you know how much you need to make (revenue) to cover how much you spent (expenses), you're less likely to go into the hole. Most business owners only want to examine their revenues and expenses around tax time but certain financial aspects of the business should be tracked regularly. It's just like balancing your checkbook, okay, I know no one does that anymore...but at the very least, you make sure the bills you're paying every month aren't more than your paycheck right?! Okay, that's BREAKEVEN!

For those of you seriously interested in pursuing entrepreneurship, I would strongly suggest not only seeking out the help of knowledgable professionals, but also taking a basic accounting class or picking up a text book and teaching yourself. You should know and understand how important accounting is to your business, whether you find it fun or not. Afterall, good accounting could help your business survive in the worst of times and help it flourish in the best.

Good Luck & Happy Accounting!