Why Every Business Decision Is an Accounting DecisionOct 04, 2019
When I claim every business decision is an accounting decision, most business owners say they don't want anything to do with accounting. I hear about when they were in school, they struggled with numbers and don't like to deal with them. Or they're just not good with numbers, or they're not numbers people. But I think everyone can do basic accounting, and I work hard to help every client become an expert on their own business's accounting.
I was once an accounting instructor at Eastern Florida State College and Florida Atlantic University. I founded The Largo Group on the principle that in order to be successful, everyone must harness their inner accountant – whether you think you’re a “numbers person” or not.
If taught the right way, accounting is something we can all understand. We just have to get back to the basics. Here are three first steps in embracing your accounting.
Step 1: Have a positive mindset
Unfortunately, many people who aren’t accountants or numbers fanatics carry an internal thought of, “I’ll never be good at accounting,” or “I just don’t get it.” Each time we pull our profit and loss (P&L) statement, we hear that small voice saying those damaging words. And we suddenly find ourselves counting the seconds until we can return to the kitchen or the showroom floor – as far away as possible from our finances!
But as owners, every business decision is at its core an accounting decision. The decision to hire an additional employee, the decision to increase advertising spending around the holiday rush, even the decision to take a vacation and leave your manager in charge is an accounting decision. What is the risk? What is the impact on the bottom line?
The truth is the more we are able to calculate the cost of each decision, the better our decisions and ultimately our business will be. That’s why every business owner should proudly accept accountant as one of many titles you wear.
Step 2: Find the time
One of the common complaints I hear from businesses is they don’t have time to analyze every decision. So, instead of analyzing, they make decisions on the fly. But while our resources may be limited, making sound decisions for our business is something we can’t afford to skip.
Most business owners, whether they realize it or not, group business operations into two categories:
- Profit centers
- Cost centers
The profit centers are the parts of the business that generate revenue. For a restaurant owner this is the time on the floor, or in the kitchen making sure the dishes are getting to the guests on time. These areas are highly important for the business, and directly impact the bottom line.
But when it comes to managing the finances of a business, a lot of business owners struggle tying the time spent on the company’s books to more profits. So, instead of seeing this time as critical to our profits, we see this as a cost to our business. “I should be on the floor, but instead I’m behind my computer!” Not seeing the impact to the bottom, it is easy to justify leaving the monthly bills in a pile on the desk for a week to tend to guests and staff.
Instead, to reach the goal of success, owners need to see their company’s finances as a profit center. Without a clear set of books, it is nearly impossible to reach a company’s true potential. As Zig Ziglar, the famous salesman, once said, how can we possibly hit a target we don’t even have? In the accounting world, how can we meet a budget we never set?
By seeing accounting as a profit center, the 30 minutes a day needed to stay current is just as important as the 30 minutes spent rolling the pizza dough or touching tables. Without a financial plan it is impossible to reach our goals.
Step 3: Get back to the beginning
The Financial Accounting Standards Board, the governing body in charge of setting standards for how financial statements are created, has thousands of pronouncements and more than 90 accounting topics and displays as part of the Financial Accounting Standards Board Codification, released in 2009. And the IRS has thousands of pages of tax code to support each line of the tax return. How would it ever be possible to know all of this information in 30 minutes a day? You don't! That's why there are people like me with certification to understand all the code and the laws.
BUT the basics are the same as they've always been and relatable. You see, the truth is that long before there were people with accounting degrees, accounting was part of society in a much simpler way. The core of accounting dates back thousands of years. In ancient civilizations records have been found showing the work of the world’s first accountants. Necessity is the mother of invention. So, even in ancient times, before currencies, people realized that to get what they needed to survive they could trade.
Intuitively, this makes sense. A farmer has always needed to determine how much corn or wheat he must sell to feed his family and survive through the winter.
And that is where accounting began. Not in the trade, but in the recordkeeping of the trade. If the farmer went to town with his full rice harvest and traded for different things, he probably came home to a family that demanded to know what he was able to get in return.
If he kept a record, he would know how much rice he had, what he received, and how much rice he should plant next year. That was the birth of accounting.
The records weren’t organized. But they served the purpose: to give the farmer a clear picture of what happened in the past and the opportunity to build a plan for the future.
In so many ways the life of an entrepreneur is very similar to the farmer. Every business owner needs to know how much money the business made this year, and how much you need to make next year to make your life plan to work.
This means those 30 minutes a day spent behind the computer on your numbers are the most important 30 minutes you will spend. You might not know every rule, but you need to know YOUR business better than anyone else so that next year can be even better than today!
If you'd like to learn what successful restaurant owners know about accounting, download our free report, "How to Avoid the 5 Pitfalls of Restaurant Accounting." Be on your way to becoming an expert on your business's accounting and have confidence in your accounting decisions.
Author: Anne Gannon, founder and principal of The Largo Group.
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