I had a conversation this past week with an entrepreneur who’s run a successful business for several years. During our conversation, I realized he didn’t know the cash flow of his business—or what that means. After more chatting, I realized that he didn’t understand his balance sheet either. He didn’t know how much he owed others or how much he’s owed. He mainly bases his decisions on his bank account balance and profit and loss statement. This approach to decision-making has hindered the business’s growth over the years.
In college, I was forced to take accounting classes as part of my finance curriculum. I’m not much of a rule follower and hated memorizing countless accounting rules. Many years later, I can’t remember any of those rules to save my life. But the concepts stuck with me. How to read core financial statements and how the statements work together to show you a complete picture of the business are the biggest takeaways from those courses. When I was an entrepreneur, those foundational concepts improved my decision-making. Now that I’m an investor, they’ve helped me spot opportunities and problems early that others have missed. I hated my accounting courses and don’t remember most of what they covered, but they taught me how to understand accounting.
Accounting is often called the language of business. To thrive in business, entrepreneurs need to speak the language—or at least understand the foundational concepts underpinning accounting. If you’re an entrepreneur or aspiring to be one, consider taking time to learn basic accounting concepts. It may be difficult, but it will likely pay off in the long run.