Storytelling is an important aspect of most, if not all, business strategies ‐‐ and finance is no exception. Whether you are seeking a loan from a bank, in discussion with potential investors, thinking about an acquisition or simply monitoring your business’s sales and financial health, it is essential to ensure that your financials tell the story that helps you sleep at night. This applies not only to what financial information is necessary to keep your business growing, but also when and how you are putting this information to use.
Liabilities are one story your financials tell that you don’t want to overlook, which is why, on Business Growth Cafe, Jean Latu of Ingenio Solutions suggested looking at your books on an accrual basis. This way, your revenue will match your expenses. Otherwise, you may be caught off guard with what you owe to others, as it won’t appear in conjunction with your other financials. There are three key financial documents which you should look at every month,: your income/profit‐and‐loss statement, your balance sheet, and your cash flow statement. First, look at your revenue, on both a monthly and annual basis, as well as in comparison to previous years. Next, look at direct expenses. When you subtract direct operating expenses/cost from your revenue, you will find your gross margin. In terms of your financial story, your gross margin, compared to your revenue, reveals your profitability, and thus, is one of the most important measures to consider.
One way to effectively analyze profitability is to look at these measures in relation to competitors or industry leaders. With publicly held companies, you can view their financials and by doing so, you can analyze and determine where your brand stands in the market, in comparison to what you planned for. Once you have determined your gross margin, profit and loss is important to consider, and more specifically, your SG&A: Selling, General & Administrative expenses. This information is key in getting a full picture of your financial story, as it includes costs that are not directly linked to just the revenue ‐‐ such as sales and marketing costs, and other indirect costs, calculated as a percentage of revenue. However, these expenses should not be included in your calculation of margin. Additionally, cash flow is another character in your financial story that should not be overlooked ‐‐ both in‐flow, and out‐flow. This information is all about how much cash came into your business from your customers’ purchases, and how much cash went out and was paid to vendors, etc. It is important to keep track of your sources of cash flow in both directions, and calculate the net cash flow, as this number tells you whether or not you are in “trouble.” Just like your personal finances, net negative cash flow, or spending more than you are making, is obviously, problematic for your future.
One reason you may have net negative cash flow is because of your accounts receivable. To avoid these kinds of issues, research the standards of your particular industry when establishing terms with your clients. Offering your clients “favorable” terms can be “unfavorable” to your business.
At the end of the day, a key protagonist of your financial story, when it comes to taking strategic action, is calculating your return on investments. In order to tell the story of a healthy brand from a financial standpoint, it is essential to ensure that your investments are truly generating revenue. Establish criteria and measures to identify the contribution to the bottom line, and ultimately, determine whether or not your plan is truly strategic, and your financials are the hero of your business’ story. For more insight on this topic and much more, listen to my recent interview with Jean Latu of Ingenio Solutions on my radio show, Business Growth Cafe here: