We often hear how speaking a foreign language is a horizon-broadening must. But speaking…accounting? If it sounds counterintuitive, think again. Knowing the basics of debits and credits and how to read your balance sheet, P&L, and cash flow statement can make or break your business. Whether you work for a start-up, manage a team or a business unit with a P&L in a national or multinational company, or are planning your own online store, you need to brush up on your accounting speak.
Why? Because the success of your company depends on it.
Here are the ABC’s of accounting speak.
A. Balance Sheet
The Balance Sheet is a snapshot at a point in time of what a company owns, or assets, and what it owes, or liabilities. The difference is the company's net worth, or shareholder’s equity. Assets can include buildings, equipment, furniture, software, intellectual property, cash, and money others owe you. Liabilities can include loans, accounts payable, and payroll and debts you owe to others.
B. Income Statement (P&L)
The Income Statement shows how your company generates revenue, what the expenses are, and the bottom line, or net income. A P&L can be generated daily (e.g. trading desk), weekly (e.g. local grocery store), but it is usually developed monthly. A well-structured P&L can highlight your profit-generating products or services and underscore your biggest expenses.
C. Cash Flow
According to Dun & Bradstreet Small Business, 90% of small businesses fail due to poor cash flow. In other words, there is too much cash going out and not enough cash coming in. Cash flow is a fundamental financial indicator because cash is king. While you may be showing profits on your P&L, if you have no cash flow your business will wither. On the other hand, you may be generating cash but not making profits.
Several online sources offer fundamentals of accounting. One thing is for sure: “Having a grasp of basic accounting terminology is fundamental to everyone in leadership of the enterprise” said Miles Hutchinson, a CPA and seasoned Accounting Faculty who led the design of American Management Association’s new LXL Express course How to Speak Accounting
While accounting and finance have been long considered scary by many, they are increasingly becoming fundamental to daily life and daily business as the bleak memories of the 2008 financial meltdown are pushed to the back of our minds and we anticipate the exciting new opportunities ahead.
So next time you are looking to improve on your foreign language skills, don’t forget accounting!
If you are interested in increasing your knowledge of finance, consider:
AMA’s Finance Workshop for Non-Financial Executives