Let’s talk financial health
Finance is often the proverbial Achilles heel for business owners; I know it was for me. There was one time in the early days of my business when I was not as on top of my cash flow as I needed to be and it almost cost me the business.
Fateful Friday, as I call it, was the day that my new finance person announced to me that my company was going to run out of cash in three months. I was completely devastated and terrified. The previous report had said we had enough cash for a year. But it turns out that report had errors. Errors I hadn’t caught. And to top things off, we had just sent the cash flow projection to our board so we had a lot of explaining and backtracking to do.
In order to avoid driving through that brick wall, I had to let some people go and really dive back into the finances myself. It was a very painful and stressful time, and I had to call many vendors and renegotiate our terms, but that’s exactly why I like to share the experience and what I learned. I never want you to experience a Fateful Friday in your business.
But more than that, I want you to be able to take your business big. And if you are considering fundraising, investors are going to ask very pointed questions about how you manage cash in your company. How can you discuss them confidently if you don’t know what the key drivers and metrics are?
Stewarding Your Money
In the finance portion of my Masterclass, I recommend that my students read Accounting for the Numberphobic by Dawn Fotopulos. This book uses plain English to explain everything you need to know about tracking the numbers in your business. Managing and maintaining control of your business’s finances comes down to regularly checking three basic reports:
1. Net Income: This is your company’s total earnings, or profit. It’s calculated by subtracting the cost of doing business and other expenses like interest, taxes and depreciation from your revenues. With it, you’ll be able to see how profitable your company is over time.
2. Cash Flow: This is the net amount of cash and cash-equivalents that flow in and out of your business. This figure can help you asses the quality of your company’s income, or its liquidity, which is indicative of whether your company can remain solvent, or whether you’re able to pay expenses, settle debts, reinvest in your business, refund shareholders’ money, and create a savings account to get through future financial challenges.
3. Balance Sheet: To a banker or investor, this one’s sexier than a string bikini! That’s because this financial statement summarizes your company’s assets, liabilities, and shareholders’ equity. Investors love this because they get to see what your company owns, owes and how much has already been invested.
After my scary wake-up call at Little Pim, I had my team create a weekly financial report and it was in my inbox every Wednesday. This document became my best friend because it laid out what bills needed to be paid, who owed us, what had been paid, and every other financial metric I needed.
Another vital document that I recommend you or your financial person create is a Sales Tracker. Your sales tracker is the holder of all sales information; every time you make a sale, it’s logged here. This is super handy when you need a snapshot of sales projections.
You don’t have to assemble this report yourself but you do have to oversee it closely and check it diligently. You want to have a finance person on your team even if they are only part time to ensure that you have someone responsible for pulling the report consistently and going over it with you on a weekly bases.
Understanding your businesses financial health is the gateway to high growth
I know that many entrepreneurs would rather leave all the financial stuff to someone else, but as I hope you’ve learned from my experience, it’s critical that you are consistently looking at the numbers. Doing so allows you to deal powerfully with issues as they arise, to know how healthy your business is, and to give potential investors the information they need to make the decision to fund you.
If you’d like to learn more about how to steward your finances and ways to raise capital, be sure to sign up for my next Masterclass which begins on June 14, 2016. Also check out another of my blogs that digs deeper into the 8 indicators that determine whether you’re ready to fundraise.