Accounting v Finance, it’s an apple and an orange

This particular post relates to qualifying the support we need and get for our businesses especially when it comes to areas of our businesses we truly do not understand. The accounting side of business comes to mind as this aspect of business is truly one of the areas that most business owners shy away from. After helping hundreds of businesses and teaching graduate level accounting at a major university, I’ve come to the conclusion that most humans would rather take a stick in the eye than try to understand accounting.

We need to understand the accounting side of our businesses so we can at least respect what it can and cannot do for our businesses. In other words, if we don’t understand what accounting is and how that non-understanding of accounting impacts our ability to manage our businesses, we could be in for a truly disappointing shock related to why our businesses are failing.

Sure, most of us have a CPA or an accountant that guides our business well enough. Some of us might even have an employee who is an accountant that manages our books. But, as I have preached for years, there is a huge and distinct difference between tax accounting (CPA, Accountant) and operational accounting. I have written numerous articles on the topic over the years and I still stand firm on the fact that I can prove that there is a huge difference between taxes and operations.

Unfortunately I have come across yet another example of how not understanding the accounting side of our business related to operations negatively affects the ability to keep the business afloat. Out of respect and confidentiality I cannot name names nor mention where exactly this example comes from but I will tell you that I am currently working with an electrical contractor in the mid-west.

Long story short, because the owners of this business “believed” their accountant and their employee managing QuickBooks for them were doing a good job – and the owners not knowing enough about accounting to “manage” the process, this business may now have to consider taking on yet another loan to survive. Simply put, these owners trusted their accounting firm to guide them accordingly as it relates to QuickBooks and they trusted their employee who is managing the daily inputs of Quickbooks to be doing as she should.

When I took a closer look at their books, I found numerous errors on top of the fact that the employee managing QuickBooks truly does not know enough about accounting to be in that role. Her response to many of my questions was, “well, that’s what I did at my other job”. Well, that other job (company) went out of business because it ran out of money!

My point with this story is that as business owners we need to know three basic things about business ownership:

1) Accounting and Finance are not the same
I have been saying this for years now, where accounting is an apple and finance is an orange. It just is. Most business errors occur because of erroneous financial reports. In other words, financial reports about a business are the result of the accounting process of a business where if the accounting is off, then so too is the financial report. Business owners and managers make decisions off of financial posture not accounting entries (debits/credits) where an error in entering a debit or credit will ultimately reflect on any report the inherent accounting software prints.

An example here is that the business owners above knew they had union payments to make as well as truck payments but those expenses were never reflected on their income statement, where all this time the owners had believed those expenses were embedded in one of the line items in their income statement. They never knew to ask and their employee never knew to identify it. What’s worse is the accounting firm they use was never asked; therefore no one realized those expenses were not being tracked. At the end of every month the owners would ask themselves, “Where’s all the money”, “Why are we always broke”? Sound familiar?

2) Qualify your CPA/Accountant
Ask your CPA/Accountant questions like how come this number is what it is? And how did you come up with this number? Show me how you came up with this number, etc, etc. It is rare as a do-do bird that a CPA firm or an accounting firm know what operational accounting truly is. After over eleven years of doing what I do, I have never met an accountant or a CPA that does what I do and I doubt I ever will. CPAs and Accountant are great with TAXES, not operations. It’s just how it is. CPAs or Accountants cannot tell you how to set up effective job costing process, they cannot tell you how to factor marginal contributions and they cannot tell you your precise overhead rate. I know this for a fact. Do not discount CPAs or Accountants as we definitely need their expertise related to tax management but they simply cannot help you operate the day-to-day of any business and I can prove it. I’ve always believed that business should always have access to a great attorney, a great CPA and a great consultant. Qualify the people who you turn to for help with your business.

3) Test before you hire
You have the right as a business owner to test those who come to you and apply for work. You have the right to test even your suppliers and vendors to include CPA and accounting firms. You have the right to test someone if they come to you and say they know accounting by having them belly up to your computer and actually show you what they know. The accounting and finance side of a business is soooo important that you SHOULD take the time to test someone before you hire them. It’s your right. There are no rules on how to OPERATE your business where you should be testing and questioning everyone that claims to be there to help. Personally, I have my clients test me by talking to as many my references they choose to. It’s your right.

Look at it this way, your car performs relative to the type of gas and the weight of oil you put into it. Imagine you putting the wrong gas or the wrong oil into your car. How would it perform?

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