I was having dinner with Bill. Bill is someone I worked for years ago.
Bill was asking me about how things were going at my company. He asked me, “Are you signing every check?”
I told him I was.
Bill is seriously old school. But Bill is right.
You need to understand where your company’s money is being spent.
So guess what that means?
You’d better understand how balance sheets, income statements, and cash-flow statements work.
Understanding basic accounting rules is not hard. Assets = Liabilities + Shareholder Equity.
That’s it. That’s all there is to it.
The rest is just basic math.
I used to meet every Friday afternoon with Tina. Tina was our very able Controller.
Tina used to come into my office with a pile of checks for me to sign. The routine was she would hand me the check, tell me what the payment was for, I would ask any questions, and then I would sign or not sign the check.
Then we would review where we were financially. We would talk about our revenue plan, spending plan, and how much money we had left.
On this particular Friday it was clear to Tina and me we were going to run out of money before we hit our next major milestone.
Tina, as she usually was, was way ahead of me. She said, “We need to either cut spending or get a loan.”
There is no way you can understand the financial status of your company without a basic understanding of accounting.
I reviewed the balance sheet and the income statement with Tina.
Tina was right. We did need a loan.
So we met with lenders and we secured a loan on very good terms.
We would have never secured the loan if we had waited until we needed the money. Then the terms would have been worse if we were able to get a loan at all.
You will be in the dark if you don’t understand basic accounting.
There’s a reason why Bill asked me if I was signing all the checks. The reason is signing all the checks forces you to understand and account where the company’s money is being spent.
Understanding your balance sheet, income statement, and cash-flow statement is the same thing. You will understand where and how quickly your company’s money is being spent.
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