Often when I ask a business owner “Who handles the financial side of your business?”, the answer I get is “My accountant”. And when I hear that, I see a giant red flag.
What that answer means to me is that this business owner is confusing Business Finance with Accounting. And they are NOT the same thing. Not at all. And when you understand the difference, huge opportunities can open up. Opportunities to make higher profits. A LOT higher.
You see, the accountant looks at the actions and decisions of a business over a period of time and then turns those actions and decisions into numbers. Because numbers are the “language” of business. Then they organize these numbers into a coherent form, ensure that they comply with certain accounting rules (e.g., GAAP, FASB, etc.) and create financial statements (e.g., Profit & Loss, Balance Sheet, Statement of Operating Cash Flows, Tax returns, etc.). And that’s pretty much where the accountant’s job ends.
The business owner, on the other hand, looks at those numbers and, based on what s/he learns from that information (and there’s a lot of it – when you know how to extract it, that is), and turns the numbers into actions and decisions for the business.
Your accountant isn’t concerned with things like operating leverage, marginal contribution, breakeven points, liquidity ratios, free cash flow, return on equity, pricing strategy, budgeting, margin improvement, capital budgeting decisions, shareholders equity vs. market cap, benchmarking and a host of other metrics that the financial statements can provide. It’s not their job.
So, in a sense, one could liken the accountant to the pitcher in a baseball game who serves up the ball (the financial statements) and the business owner is the batter who looks at the pitch and decides how best to hit it out of the park (using the information the financial statements provide).
When my clients get a basic understanding of how to extract the essential information contained in their financial statements, it’s as though they’ve put on magic goggles that allow them to see things they never saw before in the business. It is truly a game-changing experience.
They realize that the financial statements:
And that, in a nutshell, is why you should care about Finance in your business!
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