How financially healthy is your business? Do you have the focus needed to project realistic outcomes for the end of this quarter? What do you estimate your profit and losses to be? Whether you’re a fledgling startup or an experienced entrepreneur, staying on top of your accounting and knowing what your numbers mean – is crucial to success. Here we present the four stages of accounting, and a few reasons why your business needs to be at the highest level:
Four stages of accounting
When a business owner is ‘uninformed’, they are essentially running their business with the day-to-day operations in mind, but not staying financially focused and aware of their budgets, how much they are spending, and how much they have left to spend. As a result, what they’ve gained or lost in profits at any given time is more of a surprise than a savvy calculation.
At the ‘informed’ stage, the entrepreneur typically have some figures in front of them; they may have a good sense of the income they bring in, as well as expenses such as contractor costs, marketing spend, or even employee perks for a job well done. Unfortunately, this is where most accounting stops. They have numbers and reports but most entrepreneurs (or their accountant) won’t be able to tell you how these numbers apply to their business. They won’t be able to make sense of their numbers until they reach the next level.
The ‘understanding’ stage is when the entrepreneur is able to match their numbers with their business on an intimate level. Understanding the numbers is similar to understanding the instrument cluster and the navigation chart of a pirate ship. From it they see the fuel tank is full and the speed they travel at. The navigation chart tells them where they’ve been, where they are today, and where they are trying to go. They know just where they stand, and as a result, what has to be done to correct the course or push full speed ahead. It’s the same with understanding your company’s numbers. By understanding at all times what you have to work with, what had happened within the daily operations, and what was the result of a certain project, you can make informed decisions that guide the business in the right direction and towards your goals.
When you work together with your accountants, you stay on top of your needs. You know what you can realistically do and change, what the impact was from your last decision, and what risks you can afford to take. Now that you are informed and understand just what the rows of numbers in your accounting reports mean, how can you best take action to move the needles? Get in the habit as a savvy entrepreneur of routinely strategizing your next move, based on results seen in the past, new knowledge gained about your current state, and what you can or cannot realistically afford. As a result, you’ll continually improve the state of your finances, making your business more successful than ever.