After being given the task of financial reporting of the small entity that I had recently joined, i gathered relevant data, processed it and produced a basic P&L and Balance sheet. Content with my achievement (No financial reports had been prepared prior to this), I presented the set of reports to my manager, who was also the owner of this promising start-up business.
Half an hour later I was being asked questions beyond comprehension.!!!
Question: your report shows profits but i don’t have this money in my bank. where did the money from profits go?
Question: If the balance sheet is balanced, does that mean we can detect fraud?
Question: My business car has high resale value, why did you reduce its price by using depreciation?
Question: You have put bank balance as ‘debit’ but in my bank statement it is shown as ‘credit’. Why is that?
and so on….
I somehow managed to explain in simplest of terms and while I was doing so, I was constantly thinking about the importance of basic knowledge of accounting and finance for aspiring start-up entrepreneurs.(Assuming that most start-ups cannot afford accountants or business consultants). A crash course, accountancy texts or even guidance from friends/relatives with accountancy experience is a must in order to successfully launch and excel in the case of new start-ups.
Without proper accountancy, figures and estimates get mixed down the line and it becomes hard to trace financial tracks. Eventually resulting in a state where decision making becomes hard because of the obscure financial position.
The above narrative can also be proved by 2 simple questions:
Question: Why do Businesses Exist?
Answer: Primarily to make money/profits.
Question: How do you know if you are making profits?
Answer: If you know how to account for the transactions being performed and then how to summarize that data to form business and financial reports showing profits.