Do You Speak the Language of Business?

We’ve all heard the horror stories – nearly half (49%, to be precise) of small businesses fail in the first five years, according to the U.S. Small Business Administration. Why? What goes wrong?

Businesses fail for many reasons. Insufficient capital, poor inventory management, overinvestment in fixed assets, poor credit arrangements, personal use of business funds, unexpected growth, and low sales – to name a few.

What do these reasons have in common? They ALL can be avoided if you track numbers!

Even if accounting is a foreign language to you, tracking your numbers doesn’t have to be onerous or time-consuming. There are a few key numbers that you must monitor closely to keep your bottom line healthy and your business sustainable.

So, where do you start?

Start taking charge of your financial future by tracking the flow of money in your business. These basics are your “financials” and include your income statement, cash flow statement, and balance sheet. You should create and monitor these financial statements every month.

• Income Statement: Also known as the profit and loss statement, P&L, or statement of operations, this document lists your company’s income (revenues or sales) minus your expenses, and it shows you the profit or loss over a specific period of time.
• Cash Flow Statement: A cash flow statement helps you know how much money came and went through the business for any period of time. Reviewing cash flow statements will help explain why you may not have the bank reserves you’d expect, even when your business is profitable.
• Balance Sheet: This is a cumulative document that lists your company’s assets (cash in the bank, property, or equipment) and liabilities (loans you need to pay back) from the time you started your business. Reviewing your balance sheet gives you a snapshot of the financial strength and capabilities of your business.

Once your financials are in order so you can produce them monthly, what else should you track in your business?

The answer can vary, depending on your type of business. But numbers that are measured in business are typically called Key Performance Indicators or KPIs. KPIs are used to assess the performance of your organization, a specific business unit, or an individual employee. To be useful in understanding and shaping business practices, KPIs must be measurable, understandable, and controllable.

There are literally hundreds of areas in a business that can be measured. At UnlocktheSuccessCode.com, I’ve included a list of more than 100 KPIs, categorized by business function, such as sales and marketing, human resources, finance and business, health and safety, and environmental. There also may be metrics from your specific industry that will help you improve performance. Often, industry associations can provide benchmarks for key performance indicators.

Bottom Line

Do you speak the language of business? According to super-investor Warren Buffet, “You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business…”

The fact is, the numbers in this article are just a start. To ensure maximum control of your business success, you must have access to strategic numbers on a timely basis and clearly understand what they’re telling you. In chapter two of The Success Code, you can find a breakdown of each important number you need to track to become fluent in the language of business.