Accounting, The Executive's Essential Language.
Mayowa O.
Why do We Say Accounting is the Language of Business?
If you're a business executive who doesn’t understand accounting, you’re like a pilot who doesn’t understand altitude. The numbers may look good on the screen, but you won’t know if you're flying high or heading for a crash. Accounting is the language of business, and if you don’t speak it fluently, you’re likely a passenger, not a pilot.
Some executives treat accounting as a "back-office function" - something for bean counters to worry about. That’s a mistake. Accounting is the map that shows you where you are, where you’ve been, and, if read correctly, where you’re headed. If you’re flying blind on accounting, you’ll hit a wall eventually.
Warren Buffett once said, "If accounting is the language of business, then financial statements are its scorecards." But unlike a sports score, the numbers in accounting aren't always what they seem. Depreciation schedules, revenue recognition, and goodwill amortization are just a few ways the scoreboard can be distorted. Numbers lie, or more precisely, people use numbers to lie. The only way to protect yourself is to learn how to read and interpret them properly.
First, Accounting is More Than Numbers, It’s a Narrative
Too many executives think accounting is a collection of numbers: revenues, expenses, profits, and cash flow. But it’s more than that. Accounting is a narrative, a story told in numbers. It tells you where value is being created (or destroyed), where cash is being generated (or burned), and how well your assets are being utilized.
Look at the three key financial statements:
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The Income Statement: Tells you the "what". Revenue, expenses, and profits over a period of time.
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The Balance Sheet: Tells you the "where". Where your assets, liabilities, and equity stand at a point in time.
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The Cash Flow Statement: Tells you the "how". How cash moves in and out of the business.
Each of these statements is essential, but most executives only look at the income statement. They glance at the "net profit" line and think they understand the story. That’s a rookie mistake. The income statement tells you about accounting profit, but the cash flow statement tells you about survival. Many companies that looked profitable on the income statement went bankrupt because they ran out of cash.
If you want to be a competent executive, learn to read all three statements. If you want to be a great executive, learn how these statements connect to each other. The "what" (income statement) is meaningless without the "how" (cash flow) and "where" (balance sheet).
The Iron Law of Conservatism is to Trust No Profit Until It’s Cash
There’s a reason cash is king. Profits are an opinion, but cash is a fact. Any executive who has lived through a downturn knows that "profitable" companies can go bankrupt if they can't pay their bills.
Accounting rules allow companies to recognize revenue before cash is received. In fact, some revenue recognition methods allow companies to book revenue for projects that aren’t even completed. This is a loophole so big you could drive a truck through it. If you don’t understand this, you’ll be blindsided when reality catches up with the books.
Executives who rely solely on the income statement are setting themselves up for pain. They’ll see rising "profits" but won’t notice that receivables are piling up (customers haven’t paid yet), inventory is building (unsold products), and cash flow is negative. This is how companies end up looking healthy right before they collapse.
Lesson: Pay more attention to the cash flow statement than the income statement. It tells you what’s real, not what’s "reported."
Accounting Manipulation & How Might Executives Fool Themselves
If accounting is a language, then financial manipulation is its poetry. Over the years, I’ve seen every trick in the book, from "cookie-jar reserves" to "channel stuffing" to outright fraud. It’s not always malicious - sometimes executives fool themselves. They think they're “smoothing earnings” or "managing expectations" when they’re really distorting the truth.
Here are a few tricks you should know:
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Channel Stuffing: This happens when companies "stuff" distributors with more products than they can sell. Revenue is recognized early, but the distributors end up holding excess inventory. This makes the company look more profitable than it really is, until next quarter, when the distributors refuse to order more.
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Off-Balance Sheet Liabilities: Some companies hide debt in "special purpose entities" that don’t show up on the balance sheet. This was one of Enron's classic moves. If an executive can’t explain where all the company’s liabilities are, you should assume they’re buried off the balance sheet.
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Aggressive Revenue Recognition: Some firms book revenue for incomplete projects or long-term contracts before the cash comes in. It looks great on the income statement, but the cash flow tells a different story.
These tactics are used to impress investors, analysts, boost stock prices, and trigger executive bonuses. But they’re a dangerous game. Eventually, reality catches up. A wise man once said, “You can’t tell who’s swimming naked until the tide goes out.”
Lesson: Ask hard questions about revenue recognition, off-balance sheet liabilities, and cash flow anomalies. If you see anything interesting, act fast.
Depreciation, Amortization, and the Mirage of "Earnings"
If you’re not careful, accounting will make you believe in "earnings" that don’t exist. Depreciation and amortization (or D&A) are classic culprits. They rightly spread out the cost of certain assets over time, but the cash was spent on Day 1.
Here’s an example: Suppose you buy a factory for $10 million. Instead of taking a $10 million expense upfront, you would "depreciate" it over 10 years, recording $1 million as an expense each year. The result? The first year’s income statement shows only a $1 million drag on the revenue, not $10 million. It looks like you’re more solvent than you really are.
The problem is, cash has left the building. You may see a "profit," but cash flow shows a massive outflow. A smart executive understands this, but a naïve one gets drunk on inflated profits.
Lesson: Cash flow matters more than reported "earnings." If you’re running a business, focus on cash, not accounting profits.
Know the Limitations of What Accounting Can Tell You
Accounting is a crucial and useful tool, but it’s not perfect. It measures the current and the past, not the future. It tells you what happened, but not what will happen. The financial statements tell you where the business stands today, but they won’t tell you where it's going.
Here’s an analogy: imagine trying to drive a car by looking only at the rearview mirror. That’s accounting. It’s a historical record, not a crystal ball. It tells you where you’ve been, but it won’t prevent you from driving into a ditch.
This is why executives need to combine quantitative thinking (accounting) with qualitative thinking (business strategy). If you’re relying solely on financial statements to make decisions, you’re playing yesterday’s game. The best executives use a solid accounting practice as one part of a larger system of mental models.
How to Master the Language of Business
If you want to be a world-class executive, you must master accounting. Not in a "pass-the-test" way, but in a "see-through-the-smoke" way. You need to understand the core principles, the manipulations, and the psychology that drives people to distort reality. Here’s how to start:
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Learn the Basics: Don’t just skim the P&L. Understand the cash flow statement, balance sheet, and how they connect.
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Question Everything: If you see a line item that doesn't make sense, ask. If someone can't explain it in plain English, it's probably hiding something.
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Focus on Cash, Not Profits: Cash flow never lies. Pay attention to how cash moves in and out of the business.
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Study Financial Shenanigans: Learn the tactics executives use to placate analysts and shareholders. If you know the playbook, you won’t fall for it.
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Stay Humble: Accounting is complex, and you’ll never know it all. Stay curious and keep learning.
If you’re a business executive and don’t understand accounting, you’re a pawn, not a player. It’s the language of business, and the people who master it control the board. You don’t have to be a CPA, but you do have to be fluent. Accounting shows you where the leverage is... and as one very famous investor loves to quote, "If you don’t know where the leverage is, then you are the leverage."
I chose to write this piece in a clear, conversational style to demonstrate how easily accounting can be understood by anyone (executives, managers, founders, or anyone serious about mastering the language of business). Too often, accounting is presented with unnecessary jargon, making it seem more complex than it really is. But the truth is, with the right approach, anyone can achieve full comprehension and confidence in reading financial statements, spotting manipulation, and making better decisions as a leader.
If this perspective resonated with you, I invite you to go deeper. I’m hosting a 2-day intensive workshop on January 3rd and 4th, where we’ll start off the year by mastering accounting as a growth opportunity. This isn’t theory - it’s practical, hands-on learning aimed at giving executives, managers, and founders the confidence to make better business decisions. Limited spots are available to ensure a highly interactive experience.
If you'd like to join us, secure your spot by following this link. Don’t wait - growth opportunities like this don’t come around often, and spaces will fill up fast. Get fluent in accounting. Get fluent in business.
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The author wishes to thank the many subject matter leaders across the FACTS Finance Group who contributed to the insights and the FACTS Finance Group Editorial team.