If I am a Business Owner or Entrepreneur, Should I Have Basic Accounting Knowledge??
If I am a Business Owner or Entrepreneur, Should I Have Basic Accounting Knowledge??
A business owner is someone who risks part of their assets in a commercial activity with the expectation of earning a return on their investment. Many have experienced failures with a business idea but, with the bravery so characteristic of all entrepreneurs, they persevered until they positioned themselves in the business world. In Peru and many other countries, we hear inspiring success stories of business owners who now run large corporations.
Whether a business owner manages their company directly or delegates the responsibility to a professional, they must still ask themselves: What is the financial performance and economic position of my business? This answer can only be found through the reports prepared by the accountants, who are entrusted with the critical responsibility of accurately reporting the financial figures that business owners or shareholders rely on to determine the return on their investment.
The most representative reports an accountant prepares include the statement of financial position, which offers a “snapshot” of the company at a specific point in time. This report outlines the investments made (assets), the financing obtained from third parties (liabilities), or the contributions from shareholders (equity) that funded these investments. It also provides essential financial ratios, such as liquidity, solvency, leverage, among others.
On the other hand, the statement of profit or loss offers a “video” of the company’s performance over a specific period, considering that this report is not cumulative across years, unlike the statement of financial position, which accumulates data since the start of the company's operations. This report offers insights into the effectiveness of the decisions made by management. A few years ago, I heard a manager proudly say, “My statement of profit or loss is my letter of introduction to shareholders.”, to which I replied, with mild irony, “Your accountant prepares that letter of introduction for you.”
There are numerous other essential reports beyond those mentioned above that provide valuable insights into a company’s performance. To understand these, one does not need to be an expert in accounting or international financial reporting standards. With a basic understanding of accounting, anyone can read a financial report and know the status of their business. A finance professor once told me that accounting answers vital questions for business owners, such as: Who do I owe? What do I own? How much did I sell? What were my costs? What was my profit?, among others.
This leads us to the question: Should business owners have basic accounting knowledge? The answer is unequivocally yes. If I have risked my savings, assets, or part of my equity in a business, I need to know how those investments are performing. If they are not yielding the desired results, I must take the necessary actions quickly to reverse the trend. If they are, I need to make decisions to continue capitalizing on the value my business generates. Every business owner should be familiar with the reports provided by their accountants.
In my opinion, if a business owner ignores or overlooks the figures reported by their accountant, they are essentially navigating their business blindly. And anyone who walks blindfolded risks stumbling and falling into “financial” disaster. Having basic accounting knowledge is crucial for understanding the usefulness and benefits of financial reports.
Whether a business owner manages their company directly or delegates the responsibility to a professional, they must still ask themselves: What is the financial performance and economic position of my business? This answer can only be found through the reports prepared by the accountants, who are entrusted with the critical responsibility of accurately reporting the financial figures that business owners or shareholders rely on to determine the return on their investment.
The most representative reports an accountant prepares include the statement of financial position, which offers a “snapshot” of the company at a specific point in time. This report outlines the investments made (assets), the financing obtained from third parties (liabilities), or the contributions from shareholders (equity) that funded these investments. It also provides essential financial ratios, such as liquidity, solvency, leverage, among others.
On the other hand, the statement of profit or loss offers a “video” of the company’s performance over a specific period, considering that this report is not cumulative across years, unlike the statement of financial position, which accumulates data since the start of the company's operations. This report offers insights into the effectiveness of the decisions made by management. A few years ago, I heard a manager proudly say, “My statement of profit or loss is my letter of introduction to shareholders.”, to which I replied, with mild irony, “Your accountant prepares that letter of introduction for you.”
There are numerous other essential reports beyond those mentioned above that provide valuable insights into a company’s performance. To understand these, one does not need to be an expert in accounting or international financial reporting standards. With a basic understanding of accounting, anyone can read a financial report and know the status of their business. A finance professor once told me that accounting answers vital questions for business owners, such as: Who do I owe? What do I own? How much did I sell? What were my costs? What was my profit?, among others.
This leads us to the question: Should business owners have basic accounting knowledge? The answer is unequivocally yes. If I have risked my savings, assets, or part of my equity in a business, I need to know how those investments are performing. If they are not yielding the desired results, I must take the necessary actions quickly to reverse the trend. If they are, I need to make decisions to continue capitalizing on the value my business generates. Every business owner should be familiar with the reports provided by their accountants.
In my opinion, if a business owner ignores or overlooks the figures reported by their accountant, they are essentially navigating their business blindly. And anyone who walks blindfolded risks stumbling and falling into “financial” disaster. Having basic accounting knowledge is crucial for understanding the usefulness and benefits of financial reports.