The art of understanding your business from a financial perspective is a critical step for any entrepreneur. Knowing your business – financially – will provide the business owner the avenue for achieving both their short and long term goals. Today’s cash flows are met, and solid financial acumen positions tomorrows potential exit more effectively. While we would all like to be at the top of our game on day one, it is crucial to walk before you run when whipping your company in order.
The key is to know your numbers. Knowing your numbers will make decision-making all that more easy. Developing key financial reports that offer insights into your P & L, ROI on capital investments, cash flows and the like will make you a stronger operator today and position your company for achieving maximum value in the future.
The end game – creating value in your enterprise for the potential of its eventual sale – should always be kept on target in order to dovetail all of your decisions. The litmus test for any owner with each of their operational decisions should be measuring the accretive nature each decision makes to the improving the overall value of the business. Short term gains that add future long term value is the ultimate goal. Throughout the process, one will hone their financial acumen along the way.
Strategic Financial Planning Benefits: Short term financial business planning provides precise clarification of your vision to not only employees, but indirectly to customers as well. In addition, it provides a mechanism to gauge results of the business by establishing a foundation for future growth plans ultimately leading to developing a long-term company valuation. In some cases, the strategy may be to exit the business – the ultimate payoff for the business owner – by maximizing the value of the company and telling the story of opportunity to potential buyers.
Create A Financial Accountability System: Beginning with your prior year baseline, enhance this baseline with accretive product development and improved sales & margin targets. New initiatives should be developed and managed to achieve both incremental and capital-induced sales. Instill a process management system that rolls up financial activity to be reviewed monthly and re-forecast quarterly. This ongoing monitoring of your financial results will identify – in advance – items that are working, as well as initiatives that are following short of plan. For initiatives that fall short of expectations, new ideas should be generated in order to get your financial plan on track.
Quarterly Forecasting: Breaking the plan into “chunkables” enables you to better manage your plan and it essentially becomes a rolling quarterly forecast financial model. Whether your tasks are for revenue enhancement or expense control, managing by quarter and segmenting tactical initiatives allows for your financial plan to stay on course. It is no different from balancing your checkbook monthly – if you don’t create a discipline to review financials in a preset time period, the year will end and goals will not be met.
Company Valuation: Company valuation assesses the economic worth of an organization and in a situation where a company is going to be sold, ultimately what the price of the sale will be. If the company is public, a rule of thumb estimate is based on the stock price of that company. The number of outstanding shares times the value of the shares provides the market capitalization of the organization. While this doesn’t necessarily translate perfectly into the value of the company – many other influences factor in – it can provide a reasonable estimate. In private companies, the estimated company value is a little more difficult to calculate due to not so publicly-disclosed factors.
Be Accountable: Ultimately, it is all about understanding your numbers and accountability. You need to walk the walk by establishing prudent practices and routines that arrive at a common theme: Knowing your numbers. Your financial accountability metrics should include, but not limited to the following:
- Creating balance sheets for the organization
- Calculating income and cash flow statements
- Knowing your income, expense and monthly run rates
- Staying in tune with average sales and margin trends
The End Game: In order to maximize the value of your company, planning is everything. Equally noteworthy are understanding the elements in your business that equates to increasing its value. Your company finances cannot be built on a house of cards, and when you create an offering memorandum to present your company to potential investors, it has to be built on ratable facts. Anecdotal explanations will be vetted thoroughly throughout a due diligence process and ultimately will be cast aside as just that – anecdotal. An offering memorandum presents the historical financial performance of the enterprise in the context of the marketplace and projects future, believable expectations. A successful presentation is verifiable through due diligence and is not built upon speculation and baseless projections.
In summary, your financial acumen business planning provides the road map of not only where you are headed, but often identifying road blocks – in advance – to overcome. It provides a common vision supported by tactical initiatives, each designed to create greater value in the enterprise. In the end, a business operator should know their vision, their financial targets and know how to achieve them. Without that map in place, the organization will not only flounder today, but will fail to capitalize on its potential value tomorrow.