with the current problem Northwest Arkansas Business Journal Focused on accounting and finance. As someone who teaches at a business college, these two subjects are dear to my heart. I wanted to write about numbers and how numbers are the language of business.

I don’t think many of our readers would dispute me that numbers are the language of business. Unfortunately, it can also be a foreign language for many similar small business owners. This means that even the most basic concepts, such as what an income statement or balance sheet is, or the difference between cash and accrual accounting, are not understood. And it undermines the ability of these owners to manage their business.

When I teach my students about the income statement, I try to make them think about their own situation. How much money do they earn each month from their jobs and parents? And what are their monthly expenses like rent, utilities, food, etc.? The difference is a positive or negative number.

In business it is profit or loss. This can be done for any period of time, such as weekly, monthly, quarterly, or yearly. The income statement covers a period of time. Most people can quickly understand what an income statement is.

The balance sheet is another matter. To teach this concept, I found someone who owns a vehicle that makes timely payments. I ask them how much the car is worth and how much they owe. The difference is their equity. That’s the company’s balance sheet. Add up the value of all assets and then subtract the value of all liabilities or obligations. It is the owner’s equity or net worth. It’s a specific point in time. This is a snapshot view of your company’s financial situation. If positive, they are solvents. If negative, bankruptcy. Ask the same question a month later and you might get a different answer.

Mark Zweig

Accrual versus cash accounting is another issue people struggle with. Accrual accounting compares when revenues and expenses are incurred with when the money comes in or when those expenses are paid. It is a generally accepted accounting principle that accrual accounting provides a better picture of the performance of a business during a particular period of time.

For example, if a service business takes 90 days to do something and then invoice a client or customer and receive payment, it is not after 90 days that the payment is actually received, but when the work is done. is obtained. for it. Equal to the cost of labor to do it. The contrast between when the labor was done and when the labor was paid to do the work is taken into account. For example, after 1 week. I have dealt with seasoned business owners who do not understand this.

Financial accounting looks overly complicated the way it is usually taught. Debits, credits, T-accounts — people struggle with these things. But first the big picture is how you create an income statement, balance sheet, and cash flow, how you use this information to measure your business, and how cash and accrual accounting are two different things. Can you elaborate on why it is and where to find that information. It comes from something more meaningful.

Mark Zweig is the founder of two Inc. 500/5000 companies based in Fayetteville. He is also a resident entrepreneur who teaches entrepreneurship at the Sam M. Walton College of Business at the University of Arkansas. Northwestern Arkansas chapter of Vistage International. Opinions expressed are those of the author.

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