If you have ever watched the Dragons’ Den, the BBC show for wannabe entrepreneurs, you will be aware that among the killer questions that are routinely asked surround the entrepreneur’s understanding of their business case.
The Dragons themselves have built hugely successful businesses based on the fact that they understand their accounts and want to see the same level of understanding from those who are asking for money.
I’m not saying that you need to have an accounting qualification but it is crucial that the basic principles that are used in business accounting are easily understood.
And by this I am asking whether you know your cogs i.e. the cost of goods sold, from your expenses and net profit?
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These are the fundamentals that the Dragons are asking about and expect have answers which illustrate an understanding and appreciation of costs and profits.
Personally, I really enjoy the Dragons’ Den but it always saddens me when you see someone with a cracking idea and do a really good pitch but then stumble when they are asked to explain their figures and profitability plans.
They inevitably walk out of the Den filled with disappointment and, more importantly, no investment for their business idea from the Dragons because they simply didn’t understand their own fundamentals.
There are lots of books available to learn simple accountancy procedures or you could find an accountant who is willing to share their knowledge and help explain the basics.
Here at Yorkshire Accountancy, we are pleased to offer a friendly and personal service and have done for several generations now and one of the strongest parts of our service offering is that we are happy to discuss any issues of accountancy with our clients or potential clients.
In addition, accountants like ourselves could have given so much positive input to a business idea being pitched to the Dragons if only they thought to ask first.
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Of course, there are several software packages available which help small businesses and their accounts and most of them are very good indeed.
However, they do not offer this personal touch which is why accountants should be a vital weapon in the armoury of any start-up business or even well-established businesses.
Let us quickly go back and explain some more about cogs – cost of goods sold – you need to remember that all the costs associated with the goods are treated as an expense in the same period in which the goods were produced and the additional figures should be added to the cost of things like raw materials.
It’s this subtle distinction that the Dragons pick up on because they know from their own experience that the product in itself isn’t the cost of its materials is all the ancillary costs of running the factory to make it, wages, overheads and other expenses.
That is why they are so keen on drilling down to what the real production figure is so they can then work out what the actual profitability is being proposed and yet time and time again we see potential entrepreneurs stumbling with the basics of accountancy.
If you’re thinking of stepping into the Dragons’ Den, do yourself a favour and work out the real costs in the real world or contact an accountant who will help advise and inform to avoid you getting a red face as you take the slow walk out of the Den.