In praise of analysis

By MarketsCovestor

“Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.” Warren Buffett   

Accounting is the language of business and for many investors plowing through financial statements is the equivalent of getting a root canal.

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If you’ve spent hours trying to figure out why the accounting software won’t take your debit or credit entry, you have plenty of company (yours truly included).

There are two broad categories of accounting, basically managerial and financial.

The Foundation

Financial accounting deals with financial statements and the different aspects of a company’s operations.

Yet, as Warren Buffett says, “it’s important to remember the business is reflected by the numbers, and not vice versa.”

Accounting is like the plumbing in a house or the foundation of a building, the nuts and bolts of understanding what is going on in a business.

Number Crunching

If you want to know how a business is performing, the three financial statements (income statement, balance sheet, and statement of cash flows) are a good place to start.

The reason why I bring this up is that business analysis is often forgotten or replaced by charting or computer algorithms.  In my opinion, you are far better off sharpening up your accounting skills and thinking about competitive positioning instead.

Photo Credit: Fredrik Rubensson via Flickr Creative Commons

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