EPISODE A3.002 What Story Are Your Financial Reports Telling About Stage II?

Introduction

New week, same perspective with greater conviction.

After being attentive to the weekend news about the continued arbitrary government response to COVID19, there is only one course for the business owner - ignore their word salad of concern and work around it. 

Being passive and waiting for the right decision will put you out of business. There are only two ‘people’ who have that right - you and the customer.

IBGR is committed to your success and our programming is for legal aggression (OK, I’ll make it nicer - assertiveness) to open, stay open, and be profitable.

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Show Objectives
​As a Business Owner I need to understand what happened from a financial perspective during our successful attempt to prove the business idea (Stage II). Now I have to take that information and build the foundation for growth, growth that maximizes all of the company's capacity.

What is the story?

1. Given the information or reports the accounting software provides, which are the main sources of data and how to read it and,
2. Given you are in Stage III, what should it say and how do I act on the information.

What You Need to Know
As a business owner, the following 3 Statements are your friend because together provide the details of business performance:

1. Monthly Balance Statement or statement of financial position
2. Monthly Income Statement (or Profit and Loss Statement)
3. Monthly Cash Flow Statement

Here is a snapshot of the importance of each financial reporting document;

Balance Statement

The Balance Statement is a picture of an event - the business's financial position at the end of each month. Its purpose is to provide a clear picture of your assets, liabilities, and equity. Assets are what you own that drives revenue or supports business operations. Liabilities are long-term or additional obligations you have to gain assets. Equity is the leftovers when taking on liabilities to acquire assets.

The Balance Sheet divides assets into groups: Current and Non-Current. Current Assets are usually under 12 months old and can be easily converted to cash.  It includes cash and cash equivalents, accounts receivable, and inventory.  Inventory is further subdivided in raw materials, work in process, and finished goods.

• Non-Current Assets includes machinery, computers, land, and buildings as well as intangible assets like goodwill, brand, and patents. Also included in this group is depreciation which represents economic costs over the life of the equipment.
• Liabilities are listed in two groups: current and long-term. Current is long term debt that does not come due within 12 months.  This includes car payments...
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Income Statement

The Income Statement is a picture of the process - business conducted over the month. It is also known as the Profit and Loss Statement or P/L. It tells the business owner the level of profitability over the month. This a critical document for bankers and other lenders to determine if the business is a good risk. It is a picture of Revenues & Gains, and Expenses & Losses. It explains how the Balance Statement changed from month to month.

Cash Flow Statement

The Cash Flow Statement explains the process - how the Income Statement (P/L) created the Balance Statement. It reorganizes the information from the Income Statement into: operations, investing, financing, and supporting. Operations addresses the sources of cash. Investing covers how acquiring assets where acquired to operate and grow the business. Financing is about shares and dividends; most small business owners are not taking or paying dividends during the company’s early stages so this is usually blank. However, pay close attention to this item because if you were attracted by the concept of an employee buyout, it starts here. Supporting covers non-financial transactions and taxes paid during the month.

What You Need to Do
These Financial Statements report the health of your business - useful for making decisions for smart growth. The 3 also figure into marketing decisions, providing data showing which aspects of company operations provide the best return on your investment.

Here are the critical questions these answer as you make the transition from Stage II to Stage III. It is essential before finalizing your foundation for future growth:

Sales and Profit History

• Revenue and Profit performance over Stage II.

Financial Condition

• Assets relationship to liabilities – are assets greater than liabilities or assets less than liabilities?
• Do you cover costs and expenses from just sales revenue during the period?

Products/Service

• What are your Products/Services market position and amount of market share?
• Are your Products/Services proprietary or generic, easy or hard to copy?

Facilities/Equipment

• When was the latest upgrade (what is being depreciated?) to your core technology or products/services?
• If you are leasing major facilities and equipment – are the leases transferable?

Clients

• What is the average lifetime of clients? Average lifetime value of clients?
• How many current clients do you have and what is their% of revenue?
• Do you have a CRM to manage marketing and sales?
• What is the core of sales success – your P/S offer or the sales relationship?

Written by: William Eastman

Next Show
Episode A3.003: What is ABC (Activity Based Costing)?