Entrepreneurship is something we all admire and many of us aspire to. Some would say that this is not something that you can ‘learn’ as such; it has to be in your blood. Well, that isn’t always true for every entrepreneur, and, most successful entrepreneurs seem to agree that certain qualifications can be helpful in ensuring success– an understanding of accounting being the most helpful. The rationale for this – a business cannot be successful without proper money management and a degree or diploma in accounting can teach the skills necessary for entrepreneurial triumph.
The reason that an understanding of finance and accounting is helpful for entrepreneurs, is, in truth because it allows them to accomplish three key tasks:
(1) To make predictions about the future;
(2) To help make more effective commitments of time, energy and money to attract customers and deliver goods and services at a larger and more efficient scale; and
(3) To measure and reassess progress, to reward and encourage profitable behaviors, report progress to third parties, and change directions when necessary.
It’s not just about having an accounting background, the important thing for aspiring entrepreneurs is that they must learn to grasp accounting and finance tools rather than merely develop the ability to regurgitate formulas and reproduce financial statements in carefully controlled environments, in order to meet these three objectives.
The First Task: Predictions
One of an entrepreneur’s objectives is to make predictions about the future in a way that attracts others to work on a shared vision that will change the world in some way. An entrepreneur makes predictions through three basic projections: future revenues, future operating costs, and assets needed to service future demand. Accounting and finance experience and understanding helps because it gives one analytical tools to make projections and to link what is expected to happen in the real world with the value added by our efforts.
In the early stages of a venture, projections can unite a team by making a fuzzy vision more concrete, measurable, and actionable. Steps can be broken out so progress can be measured. Quantitative goals can motivate.
In the middle stages of a business, financial statements measure whether earlier predictions were accurate. Trends in sales and costs can be projected into the future. The past results of sales strategies and a measuring of today’s sales leads will make it easier to predict tomorrow’s revenues. Likewise, understanding each step in the supply chain, manufacturing process, and delivery will help predict how costs will change with revenues.
In later stages of a business, if used correctly, financial statements can reduce a complex reality into elegant simplicity, so you can separate noise from what really matters, enabling a large battleship of a company to be turned away from danger.
The Second Task: Making Commitments
Entrepreneurs make commitments in order to build capacity to service future demand and to invest in assets that will lower operating costs. One has to make commitments of time, energy, and money to help design and build sales funnels (processes that attract and close customers) and delivery processes (supply chains, manufacturing processes, or service delivery systems) where a series of steps convert raw materials and labor into something that customers need.
Costs accounting, which is the process of measuring costs and relating them to act, is the key to making good commitments. Entrepreneurs who understand the incremental impact to profits and cash flow of every incremental sales, operational, or financial decision will be the ones who ultimately succeed.
Similarly, cash flow projections and analysis help place a value on different commitments so one can be weighed up against another.
The Third Task: Measuring Progress
Using finance and accounting tools to monitor progress and, when necessary, make adjustments is crucial for a business.
Measuring actual progress versus predicted progress helps to keep entrepreneurs honest.
By accurately measuring results that are tied to individual effort, top performers can be rewarded. What is measured gets done, and people who know they will be held accountable make better predictions and are more productive.
Measuring progress in a way that links profits and processes helps a business become more productive because it allows bottlenecks and problem areas to be highlighted.
Finally, measuring progress helps entrepreneurs and small business owners spot trends in revenues and costs early, so opportunities can be exploited and problems corrected before they pose a real threat to their business.
The above shows how a background in accounting can be put to good, practical use in the pursuit of an entrepreneurial endeavor, because, let’s face it, without healthy financials, any business venture is likely to fail.