Alisharan On Accounting
Proper accounting is critical to business longevity and health. Many entrepreneurs don’t take the time, however, to set up proper systems or bring in needed support.
Steve Alisharan is a Senior Faculty Member at UBC’s Sauder School of Business. For years, he has run the MBA Core Program. He has also helped countless MBA’s and visiting Executives get a handle on key accounting strategies, principles and practices.
The Interview
1. In all of the consulting and teaching you have done with entrepreneurs: what are some of the common concerns you hear from them around managing the accounting for their businesses?
The most common concerns I hear are not having timely, useful and relevant information to make good decisions and to find out how well or poorly the business is doing.
2. What are some of the key mistakes that entrepreneurs make when they are first setting up accounting systems in their new businesses?
They grossly underestimate the importance of having proper accounting systems that can give them the information they need to run their business effectively. They know they need financial reports but they are reluctant to commit the necessary resources to get proper ones. Having said that, when entrepreneurs are starting a business they do not usually have a lot of money so they try to allocate the limited resources they have in areas where they think feel are most crucial. A lot of them think they can postpone investing in proper accounting systems until a later time.
3. Would you recommend that number-phobic entrepreneurs try to tackle their own accounting or hire an accountant to do it? Why?
I would strongly recommend that all entrepreneurs, not just number-phobic ones, hire a qualified and experienced accountant to set up the system they will need. They need to devote their time to other very important activities, such as implementation of other areas of their business plan, implementation issues and looking for markets to sell their idea/product/service to get the business up and running.
4. What are some fundamental accounting concepts that all entrepreneurs should understand?
The difference between cash flows and profits; how to read and interpret each of the three financial statements: the balance sheet, the income statement and the cash flow statement; the metrics that potential investors and creditors value. They also need to understand the limitations of the financial statements and they do not portray everything about the business nor are they representing what the firm is worth.
5. Entrepreneurs and those who study them will often focus on the importance of cash flow. “Cash is king.” Can you speak to that?
It is true you need to pay your suppliers, employees and creditors with cash which is not necessarily the same thing as profit. (see answer to previous question). To compare your business with others, to understand how well or poorly your business is doing all entrepreneurs need to have some basic accounting knowledge.
6. Some of the great 21st Century business scandals have been centred around accounting fraud. What are some common ways in which companies inch their way into fraudulent accounting and what can entrepreneurs and boards do to ensure this doesn’t happen?
These are extremely complex questions that cannot be easily answered. For those who are interested in pursuing this further, I would recommend the book, “Financial Shenanigans: how to detect accounting gimmicks and fraud in financial reporting” by Howard Schilit, published by McGraw Hill.
7. Are there any websites or simple accounting programs you would recommend for new entrepreneurs?
As mentioned above a new entrepreneur should hire a qualified and experienced accountant and seek his/her advice on the types of systems he/she needs. A starting point is for the entrepreneur to let the accountant know what information he/she wants to run and grow the business.
