Start with an aerial view. Imagine your business or organization as a country. It may be a big country or a small one. You may live in a small town or the bustling capital. Your country has mountains and forests, fields and farms, rivers and lakes. Next, imagine that all the cash that comes into your business is water. Water helps your crops to grow. You can dam water to make power to drive your factories. Store the water in lakes to save for the dry season. You can give water to your people to slake their thirst.

That water may come from distant springs high in the mountains. It may come as a river that flows by your door. It may be piped to you across a desert. But it must come to you. And you must manage it.

In the desert colonies of the old Southwest, the Spanish governors set up the acequia, or water management system. You can still see its charming canal running through Santa Fe and it is still working, providing water for gardens throughout the city. The canals are called domos and the manager is the majordomo, or canal manager. It is a very important job. The canals must be kept clean and in good repair, and he organizes this work. In addition, the canal runs through the property of many people. Each is supposed to take water only on a certain day, so that everyone has enough. The majordomo makes sure everyone follows the rules.

An accounting system does for your business exactly what a water-management system does for a city. It makes sure that the money that comes in flows to all the right places. It helps you make sure that you know where the money is. Accounting, or money management, is the art of knowing where the money is and making the right decisions about what to do with it so that your business will grow.

If the money doesn’t come in, your business or your organization will die an agonizing death from thirst.

Many of the dot-com start-ups of the late 1990s began with a large pool of venture capital cash. They had high liquidity. The managers, more often than not, spent that money on fancy
furniture, equipment, and offices and on heavy advertising, and large salaries. The venture capital cash poured out before any comparable flow of cash came in from customers. The result? All the cash drained away and businesses died of thirst. In Chapter 3, we will cover cash flow. This short example should give you an idea how important it is to manage cash flow. Pay close attention when we get there: this is a lesson that could have kept some dot-coms from turning into dot-bombs. Then, in Chapter 4, we’ll cover some ways you can actually measure the liquidity/cash position of your business.

So, the first thing your business needs to become real is cash. How do you get that cash? You can get it from selling things. You can also get it through a loan. Almost all businesses
start with a loan, whether from the owner’s savings, money collected from friends and family, the basic venture capitalists, or a bank.

If things don’t pan out, you may be able to mournfully bid farewell to your money. Family may be grudgingly forgiving. However, friends and banks have this quaint idea that they want their money back. Therefore, you need a way to track all those loans coming in. Who gave you how much and when? What did you spend the money on? Goods to put on the shelves? The shelves themselves?

Then, a miracle occurs. That first customer or client comes in and gives you cash for what you sell. What do you do with that cash? Buy more goods? More shelves? Pay off your parents? The bank? Things are going to get really complicated really fast. Your accounting system and your understanding of how it works will save you.

Your accounting system is nothing more than a series of locks, lakes, and levees for your cash flow. It’s a way of channeling and classifying the cash so that you can start to make some decisions about what to do with it and how to get more of it. You’re now doing what a manager does: you’re controlling and directing resources.

Hold that image of cash as water in your mind for another moment. It can easily evaporate. It can easily trickle away. You now begin to appreciate how important tracking what happens to that cash can be. As a manager you assign resources: people,
cash, materials, time. You need some way of knowing where your resources are, what they should be doing, and how well they’re doing it.

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