“Accounting is the language of business, and you must learn it like a language…To be successful at business, you have to understand the underlying financial values of the business.” –Warren Buffett
Time after time in my banking career I met with thousands of business owners who were looking for loans. Frequently, it became apparent that they had command of their sales and operations, but financial management was their “Achilles heel”. They didn’t speak the language of business. Many didn’t take accounting in school and there is no on-the-job training when you’re the owner.
This was my primary motivation for starting The Profitability Coach. I wanted to make business owners better financial managers. Every business owner has a big dream for their business and wants to make it happen. But they often don’t know which levers to pull to improve their profitability or cash flow. They simply don’t speak the language of business or understand the underlying financial values of the business.
Before grasping accounting as a language, it’s important to understand exactly what is accounting. Accounting is the art of bookkeeping of financial records. It shows a clear picture of the profitability, liquidity, and solvency of a business during a particular period. This information is presented in the form of reports to the stakeholders of the business.
Language is governed by grammar and other established language rules. Accounting, too, is governed by established accounting rules and principles and nationally/internationally recognized laws. As I mentioned previously, accounting tracks the financial events in the business in the past and organizes those events in reports which stakeholders use to analyze liquidity and solvency of the business (ability to meet short term and long-term obligations), how they collect receivables and turn inventory, how leveraged they are, and how profitable they are. The primary reports used are the balance sheet, the income statement (profit and loss statement), and the cash flow statement.
Whether it’s a spoken language or accounting language, the goal of these reports is to make communication simple and effective. I interviewed a CEO that said, in business, it’s all about the numbers. His experience going from speaking some accounting to becoming fluent in the language helped him with improved decision making and better business management so that he could realize the business of his dreams.
We’re going to be diving deeper into the language of accounting over the next few weeks. Keep an eye out for our next blog!