Finance and accounting is one of the most intimidating areas of business. Even setting aside that numerical literacy sucks in US education, and so you may be a total arithmophobe, the long columns of numbers and arcane terms can be confusing even to someone who majored in applied mathematics (like me). Have you got the numbers right? (How do you tell?) If so, do you know what they mean? (Um..) Are you sure you know the difference between net revenue and earnings and profits? (I don’t).
The part of finance you have to care about
There’s a very good reason (no, really!) that Fortune 500 companies are required to do their accounting by Generally Approved Accounting Principles, by which they mean “all that complex and arcane mess you see on a standard Statement of Cash Flows.” Because Ford and Toyota are required to calculate Gross Revenue and Net Revenue and Profits and Earnings Per Share in exactly the same way, all of us can look at their financial disclosures and determine which company is actually doing better. (Want to place bets?)
But you are not a Fortune 500 company. You are not a publicly-held company. You can keep your books in any way that makes sense to your shareholders — which probably means, to you.
The purpose of finance and accounting is to answer one very basic, very important question:
Am I making money or not?!
All you have to do is enough accounting to be able to answer that questions.
The Three-fold Benefits of Finance and Accounting
Actually, the “finance department” (that’s you and your calculator) has three roles, each of which involve answering variants on that question.
Am I making money? Financial Supervision
It’s easy, especially in a business with high upfront costs, to feel like you’re making money when you actually aren’t. Say you pay $100,000 to open a new restaurant. And each month you make $10,000. Whoopee! Except…. you’re paying $2000 in rent and $5000 in raw materials and $2000 in salaries and….
How much money did I make? Financial Assesment
Unless you’re lucky enough to live in a country that doesn’t collect taxes from businesses (and I don’t think there are any), you’ll have to tell the government how much you made during the previous year. And you’ll have to convince them that you’re telling them the correct number. So your financial department should be able to produce that sort of report.
How much money would I make? Financial Projection
The third role of the finance department, often under-utilized by small businesses, is to help you with decision-making. When you’re deciding between two (or more) routes, make some guesses as to what would happen, and plug those numbers into your financial statements. What would your business look like in a year if you chose this route? What would it look like in 2 years? 5 years?
This method can help you avoid spending too much money at a time and getting yourself into trouble down the road.
Resources for Further Reading
No Frills Accounting — This is the spreadsheet I created to track the very basics of your financial situation. It’s a huge spreadsheet (there’s a lot of number-crunching going on in there), but it does what you need it to do.