What Should We Measure?

BusinessLearning.jpgI was having a conversation with a young artist this morning, a lovely young lady who makes jewelry. She wants to start her own business.  She thinks she should take some business courses before she graduates from college. She is thinking that she may need those skills to start her business, and that it would not hurt to have them even if she goes to work for someone.

That is a smart girl.

More people should learn more about how business really works.  It does not matter what the product or service is, there is a fundamental foundation that every business should be built on, the language of business—accounting.

Before you tune out, consider this:  business is an intellectual sport. I did not think that up—we have Keith Cunningham to thank for that line. Like any sport, business has a scorecard, and in business we do keep score. We measure things like revenue, profit,and expenses; all these are scores of a sort. Baseball has many different measurements, like hits, walks, strikes, and batting averages. In the end, there is really only one measure that matters, and that is the number of runs on the board. In business, there is only one score that really matters—cash from operations.

Now revenue is important, as are assets, expenses, and profit. But you have to remember—profit is just a theory, it is not reality. Cash is reality. Many companies make strong profit but lose cash. You cannot spend a profit; you can only spend cash. If you are not careful, you can grow your business right out of business.  Not too long ago, I watched a small company grow its revenue over 60%—and they died when they ran out of money to keep the doors open. The owners did not understand the fundamentals of good cash flow, and a promising company died.

Cash is an asset. Cash is very flexible—it pays bills, payroll, and taxes. If cash comes in at a slower rate than it goes out, the business will eventually run out of cash. If you tie up your cash in plant, equipment, and inventory, your flexibility is limited. Cash is the air that a business needs to live.

So did I suggest that she take some accounting? Yep, but just the fundamentals, nothing deep.  I also suggested Intro to Finance, where she could get a quick idea of how to find cash to start her business, or understand where an employer gets cash to run a business. I told her this would give her a leg up on many others who have no clue what the language of business is.

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