It is, for example, entirely possible for a company to be profitable but fail anyway because it does not have enough cash coming in to pay its bills.
“It’s like a racecar that goes too fast and runs out of gas,” said Doug Tatum, a serial entrepreneur who is a visiting professor of entrepreneurship at Middle Tennessee State University in Murfreesboro. Business owners do not necessarily need to know how to prepare a balance sheet, but they do have to know which gauges to watch.
One obvious step is to work with a bookkeeper or accountant, someone who can help navigate arcane accounting and tax rules and organize your affairs. But owners should understand that accounting is not just about paying taxes or reporting results.
“Small-business owners tend to hate accounting because it’s boring,” said Brian Hamilton, chief executive of Sageworks, a company in Raleigh, N.C., that tracks financial data for privately held businesses. “The mistake they make is not thinking about how they can use certain numbers as tools to better manage where their business is headed tomorrow.”