Accounting with eyes wide open
Something they teach you in business school (and should do in high school) is basic financial accounting. Something else they teach you in business school is managerial accounting. These two topics are related like competitive and social Magic the Gathering.1 One emphasizes the rules, while the other emphasizes the story, but they’re both based on the same information.
The awesome2 Cosma Shalizi sent me a link to an article which describes a Wharton professor’s work on accounting and managerial bias. Two reports are profiled: one showing that budgeting and internal reporting can help improve forecasting (provided the management believes it), and the other showing that entrepreneurs have a tendency to be overoptimistic — they start to believe the story they’re telling to their own detriment.3
You might be asking why I’m bringing this up. After all, as “Not Employees” we don’t need no stinking accounting. If you believe that you’re not ready to work for yourself. You may not need fancy cost accounting, but you better be sure to have a decent (and reasonable!) forecast. Want to get a loan to advance your business? How about one to fix up your home office? You’ll need to show the bank that you know where your income is coming from and how under control your expenses are. Reasonably-priced credit belongs to the well-accounted. Don’t get caught with stars in your eyes.
- Forgive me, I’m sure I’m out of date. Pick your favorite rules/story metaphor. [↩]
- He’s too modern for “learnéd” and too young for “venerable”. [↩]
- This reminds me of the entrepreneur’s cliché, “If I only get 1% of that market I’ll be rich!” [↩]
Author: Barbara
Posted: Sunday, March 30th, 2008
Category: Readings
Tags: accounting, advice, business, entrepreneurship
April 21st, 2008 at 5:02 am
[...] Accounting with eyes wide open [...]
April 22nd, 2008 at 9:07 am
Lead by revenue not expenses. It can be difficult in my field, but its a great rule to live by. Hope you like it too.