By Finance New Mexico

Accounting is the lingua franca, or common tongue, that allows business owners in multilingual New Mexico to communicate no matter what language they speak at home.

A basic understanding of accounting principles allows entrepreneurs to take batches of numbers and translate them into easily comprehensible statements of performance and profitability. It helps them keep track of money as it enters and exits their coffers and make reasoned decisions based on what the numbers say.

Even those without the time or desire to become fluent in the language of commerce will benefit from a “conversational” grasp of the basics.

Tracing the Green Line

Proper accounting allows a business to follow the path of every dollar that it receives from a customer, including the dollars promised but not paid. When someone pays cash for a product, the actual money is tucked in the register for later deposit in the business’s bank account, and the transaction is credited to the appropriate account. Another account monitors the progress of credit sales until the payment arrives, and yet another tallies the past-due invoices.

From these accounts the business generates two fundamental financial statements that document its income and cash flow. The income statement reflects revenue and expenses, while the cash flow statement follows the movement of money into and out of the business during a specific period. Both allow the company to analyze its progress in tangible ways.

Reality-Based Analytics

Accounting tells business owners where they truly stand. The business might be thrilled to see inventory moving out the door, but if a significant percentage of customers pay their bills late or don’t pay at all, the ledgers will contain that critical information, allowing the business to take steps to collect aging accounts.

Accounting systems monitor the overall health of a business and strive to maintain an ideal balance among the separate moving parts. For example, an increase in manufacturing costs can erase any profits the business might assume it’s making through increased sales. The same goes for evaluating where the business stands in relation to industry competitors: Because businesses use the same accounting metrics, a comparison of financial statements offers an accurate picture of how efficiently each is using the resources it has.

Solid Decision Making

Accounting provides the reality check that employees need to evaluate the security of their jobs, and it tells creditors and suppliers how reliable and creditworthy the company is. In essence, it provides the data for clear-headed decision making by internal and external stakeholders. Management especially can rely on accounting to know, for example, which debts are most pressing, when to apply for a short-term line of credit to meet payroll and how much cash is available for growth and expansion.

And accounting establishes a straight and narrow path that can keep a company on the right side of the law and the taxing authorities. While cunning accountants can “cook” the books, equally talented auditors — using the same numerical language — can uncover the deception. With accounting, the numbers don’t lie.

Accounting is just one topic addressed during Wesst’s Business Plan Toolkit workshop that will take place in Albuquerque in September. Visit www.wesst.org for more information.

Download 407_Understanding Accounting Basics Empowers Business Owners PDF