Understanding the Rules is Important
Many people start or have started businesses every year without having any accounting skills. Entrepreneurs and business owners should have a strong grasp of finance in order to understand the business’s financial situation, make informed decisions, and ultimately achieve their goals. Financial intelligence gives you the knowledge and skills to manage a business more efficiently and economically.
A road map
Without financial skills, managing a business is like driving across the country in a car without a map. It is also like driving a car across the country without a road map or knowing the signs and how much fuel you have left.
Business owners can learn basic financial intelligence to be able determine if they’re on the right path to success. They can identify the alternatives, deviations and any other changes that are necessary to follow the correct path while managing their business’ resources and making decisions. It is possible to understand and navigate the financial statements and know the current financial position of a company to avoid potential problems. Both cars and businesses need regular maintenance and diagnostics. Without financial driving skills, and navigation information, it is possible to get lost.
While there are some accepted accounting principles (or GAAP in English) and financial guidelines, each year brings new developments. Taxes, accounting, financial laws and policies all undergo changes to keep up with economic reality. It is important for entrepreneurs to be aware of new regulations, policies, and laws and to also understand how these changes could affect their business’s course and navigation.
A brief overview of the Financial Reports
The income statement, a financial tool that displays the profit and loss (P&L), performance of a business over specific periods of time, is usually delivered in monthly, quarterly, or annual reports. The income statement, which is a summary of the financial information, shows the revenue or money earned from the sale of products and services, as well as the expenses and the profit or income that remained. Revenue minus expenses equals net Income. The balance sheet provides financial information on the assets, liabilities, equity, and capital of a business at any given time. The balance sheet is used by people who have more financial experience to determine business equity and net worth. This is the difference between what the company owes and what it owns. It also shows the assets and liabilities of the business. The assessor will have a good understanding of the balance sheet and can make informed decisions about the business.
The cash flow statement is also vital to understanding a business. The cash flow statement provides information similar to that of a business’ bank account. It also shows how income and balance changes affect cash. It can help you determine what happened to working capital over a specified period.
License, insurance, and registration, please
Let’s continue our analogy about the driving situation a bit more. The driver’s insurance, driver license, and registration are as important as the financial reports mentioned above for the business owner and entrepreneur. The income statement, balance sheet, and cash flow statements provide detailed but related information that can give the “driving record”, or the business’s driving record. These reports allow the reader to see if the business is profitable or losing money, if it is burning too much cash, and if it will be successful. These are the three most critical pieces of information that entrepreneurs and business owners need to be able to identify common pitfalls and improve their business’ performance.
Jose de Jesus Figueroa, a former electrician, is currently enrolled at Western Carolina University’s Masters of Entrepreneurship Program.
His interests include entrepreneurship and start-ups as well as consulting, finance, strategy and innovation.
Jose has worked in Mexico for non-profits, businesses and universities. He has been a teacher of mathematics for many years. He is also an expert translator/interpreter from English to Spanish.
Jose has been contemplating starting a business for the past few years. However, he decided to enroll in graduate school first to keep his skills sharp and updated.
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