Six accounting rules to break

                                                                                                                                              06.10.2011

When you hear the word "accounting" I bet you feel either scared or bored.

The difficulty is that accounting is often not very useful or exciting. But it can be. In fact, it should be.  The key is to give up thinking like an accountant and instead think like a finance person.  There is a substantial difference. 
Accountants live by rules.  Finance professionals break them.  Accountants give you data about the past.  Finance professionals give you actionable information about the future.  Accountants are stuck in a cube.  Finance people get out and look at the business as a whole.

So when you are ready to look at your business like a finance professional, start by breaking the rules of accounting:

Don't Use Standard Financial Statements
Accounting software like Quicken is designed to give you the basics: everybody starts with the same financial reports. But your business is unique, and you want to track things your own way. Make your books look any way you want.  Finance people re-arrange costs so important data stands out. Identify spending in key areas, and see how that has impacted the rest of the business.

Look Forward, Not Back
Running your business by looking at last month's books is like driving by looking in the rear-view mirror.  Accountants look backwards, while finance professionals look at where the business is going and how you want it to get there.  Historical data is helpful, but only if you use it to project the future. Work from budgets and forecasts, not last year's P&L. 

Measure More than Money
Accounts and accounting rules focus on results -- the amount of money in the bank or the profit from a particular product.  That's fine, but business is about the things that happen BEFORE there is money in the bank.  Do you know what metrics you should have on a "dashboard" to run your business?  Don't use a bunch of historical accounting numbers.  Go for the finance angle by charting the actions that created the results.  Look at how many phone calls your sales people are making, or how many hits your website is getting.  Measure things that matter.

Pipeline, Not Past Performance
Finance people force the accounting data to show them the future.  If you are only booking sales when the contract is signed or the money hits the bank, you're not thinking like a finance guy.  Start using purchase orders, estimates, quotes, and other predictors of future business.  Every accounting software package lets you do this, but few companies implement it. Too bad -- sales pipeline is probably the single best indicator of your future success of failure.
Break the Income Addiction
Accountants get pretty hung up on the Income Statement (also called P&L).  Finance pros worry about the much more critical issues of cash flow and cash position. You would be surprised how easy it is for a profitable business to go under for lack of cash -- and likewise for a non-profitable business to succeed (Airlines? Banks? Auto Companies?).  Break your addiction to the income statement and start projecting cash flows and balance sheet items.

Plot the Ratios
It's easy to keep an eye on things like sales, cost of goods, and profit.  But look deeper at common ratios and you may see an entirely different story.  Climbing sales are nice, but not if they are squeezing your gross margin percentage (ratio of sales to cost of goods).  A few delinquent customers are no big deal, but your Days Sales Outstanding might give you a shock (ratio of sales to collections).  Finance guys think in ratios, not just raw data.
When you throw off the rules of accounting, you'll realize that strategic finance can be your single best tool for creating a profitable, sustainable, and future-proof business. 

So keep looking toward the future -- using finance to guide you.


David Worrell
Allbusiness.com

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