What do you really know about accounting?

One of the first steps you have to take when you open a new small business is to hire an accountant. Most of us don’t know much about accounting, so we tend to trust the professionals implicitly. But it’s important to remember that your business’ financial future is at stake and to educate yourself about potential pitfalls. Here we review some of the misconceptions about accounting that even some accountants believe:

Misconception 1: Financial reports are meant to impress investors

You may want your investors and potential investors to think your company is doing well, so you let your accountant manipulate the numbers to make it seem that your business is more successful than it really is. But the primary purpose of a financial report is to give you a complete picture of what’s working and what’s not. So ask your accountant to create a financial report that serves the purpose of business intelligence, and worry about the investors later.

Misconception 2: Overestimating the importance of financial reports

Since financial reports are easy to manipulate, their importance is not as great as you might think. In order to produce a report which is helpful to you, start by determining which metrics are important to you and only afterwards start to crunch numbers.

Misconception 3: Overestimating earnings management

Most small businesses that fail do so because of cash flow problems. If you don’t have an accurate picture of your cash flow and you think you have more money coming in than you actually do, you are unable to properly manage your expenditures vs. income.

Misconception 4: Fraud is rampant

It may seem that fraud is everywhere but this is just because the media highlights cases of fraud. In fact, fraud is pretty rare and most business people and accountants are honest hard-working folk.

Misconception 5: Accounting regulations help accountants serve you better

Unfortunately, most accounting regulations are there to serve a bureaucratic process and are not set in order to improve the service given to clients. Clients need to look out for themselves instead of depending on regulations.

Misconception 6: Accounting theory applies in all situations

Accountants learn a lot of theory in their education, but it doesn’t all apply to every situation. Each business is different, and the exact circumstances need to be taken into account, instead of relying on blanket statements put forth by academics. Remember that what’s good for most businesses isn’t necessarily good for yours.

Misconception 7: Industry terminology has a uniform meaning

When your accountant uses a specific term, ask him or her to define it for you. Terms can mean different things to different people, so if you want to understand exactly what your accountant is telling you, dig deeper and ask lots of questions.

Misconception 8: Quantitative report is best

Accountants think in terms of reports and may suggest frequent reporting. While there is merit in being on top of your financial situation at all times, it’s much more crucial to get quality reports, which provide you with in-depth information instead of going after the low hanging fruit.

Misconception 9: Your business is an island

You may be doing everything right, but your business is not an island. External economic realities will affect your business and must be taken into account when predictions for the future are made.

Misconception 10: Your business will continue to be managed the same way

Just as the circumstances around your business will change, there are likely to be internal changes in your business’ management as well. These need to be taken account too when looking at the direction the business is going in.