Importance of Financial Education for Your Success

April 9, 2011   Filed under General

Accounting — the language of business, Why?

In the book Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage by Mary Buffett and David Clark

Warren Buffet said,

“You have to understand accounting, it is the language of business.

It is an imperfect language. But unless you are willing to put in the effort to learn accounting, how to read and interpret financial statements you shouldn’t be investing”.

Let us go a little further than that. In truth, I will say you shouldn’t operate a business if you don’t understand accounting.

The word is “understand”. I did not say you must be an accountant or you get an accountant, and you must understand accountant and know how to apply the accountant.

Why did Warren say, “Accounting is the language of business”?

Let’s go to financial education in business. Business have two teams.

You first have Management and then second is Accountant.

This is like if you look at a ball game, you have players on one side and there are the scorekeepers on the other side.

Management allows the business to run. Accountant is in charge for keeping track of the business; every business transaction is being recorded.

So let’s have a look, Management starts with budget planning.

It is what you are going to do, and then implement the plan — that is DO

Then Check to see if the plan (what they do, how this compares to the plan) and take Action to change what they Do or change the Plan.

When the Management plans, the Accountant converts the plan into a financial plan called a budget.

“Without a budget a plan is merely a dream”.

When Management apply the plan, “DO” the Accountant, records every activity, every transaction that’s going on in the business by a process called bookkeeping.

What’s bookkeeping for?

Its purpose is to set the financial reports by keeping track of the business.

Bookkeeping gives out financial reports.

What are financial reports? They are simply

Profit & Loss Account.

Balance Sheet.

Cash Flow.

These reports go back to Management to Check performance with the Plan so that Management can take Action and will either change their Plan or change what they Do.

As you can see here, all that happens in the business eventually ends up in the financial statements.

Profit & Loss Account.

Balance Sheet.

Cash Flow.

That’s why Warren Buffet said, “Accounting is a language of business”.

If we are unable to understand the financial reports. Then we wouldn’t know what is happening in the business.

On the other hand if you know how to interpret and understand profit loss, balance sheet, the financial reports, and can Go Beyond the Numbers, you would be able to go back from the reports and exactly discover what is happening and who is doing what in your business. And then you can take appropriate action.

It would be good to know if you are able to handle your company by the process of understanding the financial statements and have practical money skills.

That is why Accounting is the language of business.

Colin Burr has been in the field of money problems for a long time and maintains a website about practical money skills where you can get answers to all of your questions.

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