Excellent executives know everything about the business they run. They know how each department operates and how every single job affects the company’s bottom line. One of the most important aspects of running a business is the accounting. A solid accounting strategy can make the difference between a profitable and a bankrupt operation, and every CEO must be knowledgeable in basic accounting practices so as to know if their company’s strategy is sound or not.
Although CEOs could just simply trust the reports and advice of their accounting departments and financial executives, it is better for business if they interpret the information on their own and form their own opinions. Having a CEO who is educated in basic accounting is always preferable, and this why every aspiring CEO should, at the very least, have the following four basic accounting skills.
1. A solid understanding of the basic accounting equation: This equation is the foundation of the double-entry bookkeeping system (the most popular bookkeeping method for most businesses). The equation is used to detect errors in bookkeeping and is written as follows…
Assets = Liabilities + Shareholders’ Equity
The term “assets” refers to the actual property owned by the company, “liabilities” refer to the debts owed by the company and “shareholders’ equity” refers to the money left over as profit and interest payments for investors. Even though a CEO is not responsible for keeping their company’s books balanced, they are most certainly responsible for making sure their accounting department is doing their job correctly. This will require regular reviews and briefings on the financial state of the company, and knowing how to use and interpret the basic accounting equation will help a CEO gain a stronger understanding of where the company stands financially.
2. Familiarity with accounting terms: Although CEOs leave the actual number crunching to experienced accountants, they still must have the ability to correctly read and interpret financial statements and confidently report profit information to shareholders and employees. The only way a CEO can do this is by learning the full meaning of every term in their financial statements, giving them the full picture of the company’s performance.
3. Knowledge of unethical and illegal accounting practices: Remember Enron? This former corporation is the perfect example of accounting gone bad. To this day, the executives who were running the corporation before its demise are still declaring their innocence; saying that they had no idea the company was cooking the books. Now, we may never know the real truth behind the scandal, but one thing is for sure, if the execs are telling the truth, perhaps a little education in unethical and illegal accounting practices would have done them some good. Knowing the difference between good accounting and bad accounting can help a CEO spot the red flags in financial reports and stop the destructive practice before it causes irreparable damage.
4. Ability to use basic accounting software: Although it is still called bookkeeping, most ledger activity is now completed on the computer. Understanding how accounting software is used to keep a business’ books balanced is necessary to see the whole picture of company’s financial situation. It is also good for company efficiency, because if there are every any accounting problems, the CEO will be able to quickly understand why the issue happened and how it can be fixed.
You don’t have to earn a degree in accounting to gain a solid understanding of the basics. There are hundreds of books about accounting, and if you are more interested in learning through a course, consider taking a massive open online course or signing up for an online accounting class at a local college or university.
Raine Parker works for AccountingDegree.com as a researcher and copywriter. Because the world economy is larger than it has ever been in history (and it is still growing), the need for professional accountants and good accounting practices is greater than ever. This realization is what gives Raine the inspiration to write about the importance of accounting education and degrees. Please share your comments or questions with her below!