Accounting Skills Required!
The purpose of The Lemonade Game is to teach the average person and student the basic skills of double entry accounting. It is a critical component of achieving financial success and keeping track of your assets and their rate of growth or decline. Managing and keeping track of your money counts (double entendre intended) and it is imperative to know where you are fiscally in time and which direction you are headed! The ability to read a financial statement and decide if an investment is meritorious is important as we build up our company or our personal net worth. Only a minority of us can do basic accounting and even fewer still really understand what a balance sheet is. If we are going to get to the point where we can have a serious debate about investment strategy or financial accountability, we first need to learn some essentials. Even more to the point is the most recent statistic that one in three Americans in 2014 over the age of 50 does not have a retirement account or any money put away for their life expenses as they begin to slow down in their career. Dependency on social security or other stipend will be draining on an overwhelmed underfunded system leading to it’s own liquidity crisis.
Over fifty percent of young people between the ages of 25 and 35 do not have a savings account. That makes investment very challenging and perhaps unlikely for many! The first secret to acquiring wealth is to spend less than you earn and put the difference in the cookie jar to be invested wisely and compounded into a significant asset. How can we make that happen?
The short answer is making a budget and posting our real time results on a balance sheet to see the process. Having an exact method of how much money is coming in and the amounts being expended is the first step in creating a program to save money. From that savings, investing without being too “RISKY” and optimizing your assets over time is an imperative skill to building an asset. The Lemonade Game is written from a space of having fun while we learn these techniques and principles and apply them in a real world way (the practicum).
A brief history of accounting follows:
In Renaissance Italy, merchants and property owners used accounting not only for their businesses but to make a moral reckoning with God, their cities, their countries and their families. The famous Italian merchant Francesco Datini wrote “In the Name of God and Profit” in his ledger books. Merchants like Datini and three centuries later Benjamin Franklin kept moral account books, too, tallying their sins and good acts the way they tallied income and expenditure.
One of the facts about the Italian Renaissance is that it depended highly on a population fluent in accounting as it became a progressive intellectual society. At any given time in the 1400s, 4,000 to 5,000 of Florence’s 120,000 inhabitants attended accounting schools, and there is ample archival evidence of even lowly workers keeping accounts. This allowed residents to purchase and sell assets and the result is that the markets and society prospered in every facet.
Other notable outcomes are Cosimo de’ Medici and other Italians dominating European banking by really understanding the numbers. More and more merchants, landowners, professionals, farmers, and residents of cities and districts came to the realization that results were often most accurate by maintaining accounting records. In short it was a way of keeping score with reliable assurance verses guesstimation. Medici himself did yearly audits of the books of all his bank branches and it gave him the confidence to make projections with a certain accuracy fueling massive growth. It was also extremely useful in political offices in cities such as Florence, Venice and Rome where government required a certain amount of transparency to head off revolt.
For capitalism and financial growth to work, average people needed to know how to do double-entry bookkeeping so they can keep track of their transactions.. This type of accounting makes it possible to calculate profit, loss, and capital by balancing debits and credits in parallel columns. If we want to know how to make our companies, or our personal financial net worth more lucrative, we would do well to study the Dutch.
The spread of double-entry accounting to the Netherlands during the early 1500s made the country the center of accounting education, world trade and early capitalism. Well-accounted-for provincial tax returns allowed the Dutch to float bonds at dependable 4 percent interest rates. The Dutch trusted their managers to know how to keep good books and make regular interest payments, while paying off state debt. Every level of Dutch society practiced double-entry accounting — from prostitutes to scholars, merchants and even the Stadholder, Maurice of Nassau. Painters regularly depicted merchants keeping their books; In other words, the advantages and pitfalls of accounting were at the fore of public consciousness. In 1602, they invented modern incorporated capitalism with the foundation of the first publicly traded company the “Dutch East India Company”.
Not only did the Dutch have basic financial management skills, they were also acutely aware of the concept of balanced books, audits and reckonings. They had to be. If local water board administrators kept bad books, the Dutch dyke and canal system would not be well maintained, and the country risked catastrophic flooding.
This desire for accountability was what pushed the Dutch to reform their financial system when it began to be tested and questioned. The first shareholder revolt happened in 1622, among Dutch East India Company investors who complained that the company account books had been “smeared with bacon” so that they might be “eaten by dogs.” The investors demanded a “reckoning,” a proper financial audit. From that came clarity and confidence thus leading to investment in colonies such as the purchase of Manhattan for $24.00! Other investments followed and partnerships on trading boats with shared revenues and expenses were the normal business. The precession from that was establishing international trading ports and thus buying and selling land and buildings all over the world. The Result? The creation of vast fortunes for many who understand how to conduct business and be accountable to fellow partners, the government, investors and ultimately themselves. A proper way to keep track dollars or terms of who owed whom, and what were the equity and liability positions with each party and transaction big or small is essential.
THE LEMONADE GAME desires to teach you the same skills! Moreover, during the last thirty years there has been a structural change from entering data by hand with pencil and paper into ledgers, and now that has transformed to modern computer posting systems. In this new paradigm accounting is almost exclusively viewed in digital records. Going back to basics and having a fundamental understanding of the numbers and the predictability of where will be at a certain point in the future is another purpose of the game.
As Marshall Thurber says “What is Leadership in one word?” PREDICTION. Leadership is the ability to make accurate predictions. Understanding what all the numbers represent is a skill set you want to master! Knowing the theory and practicum of The Lemonade Game will increase your chance of success exponentially.
A portion of this essay was written by Mark Lefkowitz and Marshall Thurber for The Lemonade Game and the history portion by Jacob Soll, a professor of history and accounting at the University of Southern California