We often say that the language of any business is your Financials.
At OptiGrowth, we apply the philosophy of building a sellable business as a means of growing and eventually getting Freedom from your business. In this way we help Business Owners take a step back and view their business as a investor, looking for a return on their investment in the business.
It’s a sometimes harsh, but objective way to plan and implement the structures and changes required to achieve the goal you, as the business owner or shareholders, had at the inception of your business.
So why is the language of a business your financials?
Your financials speak to what’s happening in the business. It drive strategic thinking and sets target for where you, as the business owner, wants the business to go. By evaluating financials, you can ask yourself tough question like how big is the market I am part of and what share of that market am I targeting to take hold of. Building on that, the business then starts planning its spend, return on spend and pricing models to suit the market, as an example of follow-through questions.
Have a look at the pitch below from the UK’s Dragon’s Den. See how seasoned investors quickly withdraw from a potential investment due to the business owner not being able to justify her business model, due to not having a good understanding of her company’s financials.
In this clip the business owner does get an offer, for a far greater amount of equity than she initially proposed, due to the high amount of risk the investor would have to take-on. Thus resulting in a far lower valuation and greater need for return from the investor.
The basics are this:
- Your profit and loss statement, indicates whether or not the business model works. That is, can the business generate enough revenue to result in a business making money after all expenses are incurred.
- The balance sheet speaks to the business’ current state of what it owns and owes, as well as contributions from its shareholder – either through capital investment or retained income
- The business’ CashFlow statement indicates the relevant cash flows either into or outwards for the business.
When determining the value of the business, an investor will use these three reports to justify the business idea and assess if the investment is worth the risk and, hopefully, the return of the investment made.
So, why don’t more business owners take the time to evaluate these reports? They are critical to the success of any business and justify any strategic plans, or future investments they may be considered.
The answer tends to be simple – its intimidating and sometimes scary. We all have have an Accountant that’s required to do compilation, review and, depending on the size of the business, an audit each year. However, small to medium sized business don’t ask questions about their results and often only evaluate these results months after they’ve happened, if they understand how to intrepid the results.
So where do you start?
Ask questions. Speak to your accountant or bookkeeper to understand why certain transactions are in certain reports. Question reasons for why some transaction are move between various accounts and why your profit doesn’t match what’s in your bank account.
Draw on the knowledge of people who know. Speak to your trusted OptiGrowth mentor or Business Advisor to sit with you and drive a financial review process. This should allow to, no matter the question, get a deeper understanding of what the effects of your business decisions have your financials as well build strategies to improve your business operation as a whole.
Reach out to us and let us show you how we can not only build your business but make it Dragons Den ready.