By Maurie Cashman
Funding your business is one of the top three concerns among mid-market business owners. This was apparent in the Pepperdine University study we talked about two weeks ago and confirmed by an Axial study published this week. Last week we talked about one of these concerns, acquiring and retaining talent, so letâ€™s talk about acquiring and retaining financing this week.
The Importance of Good Financial Statements
Good financial statements are absolutely essential in acquiring financing for your business. Your banker or CPA only understands a fraction of your business and most of that comes from the financial statements. They are further not likely to ask beyond the financial statements, so donâ€™t expect to get advice and in-depth analysis unless you ask and are ready to pay for it. You need good financials so that you can have a solid grasp of how your business is performing, not only recently but how it is trending over time.
Your financials should allow you to analyze cash flow, taxes, capital utilization, margins, sales, overhead utilization and operational efficiency quickly and efficiently. You also need to find talented advisors that can analyze this information and make sense of it so that you, as the owner, can make faster and more accurate decisions as well as approach your financier with good data.
Most businesses look at their financials only occasionally and then, only when forced to. It is not something that many feel comfortable with or know how to interpret well. However, there are important insights into your business that are lurking in your financial data, and sometimes you need skill to dig them out.
For example, most businesses will spend considerable time (if they spend any at all) on how they did last year. They may have sales goals for next year but there is no basis in reality. I recommend companies do a three year historical look back and a three year projection forward at a minimum. Five years is better yet. This gives us a longer-term look at all of the measurements cited above so that we can see what is getting better and what we may need to look into. A snapshot of one year is a sure way to get surprised when the next year turns into something completely different.
I had a client once who did considerable work for very large, multi-national companies. I did a deep dive on their sales to try to determine what was driving growth and margin variances from year to year. The business was a cyclical type of business but the cycles were somewhat predictable and they were often moving counter to the cycles.
As I looked I found that they had ten very large clients over the past five years that they had done significant work for. However, they had only done work once and not again during the five year period. All indications were that they were well-satisfied with the work that was done. Each had massive opportunity for more work. When I asked the owner when someone had last contacted each of these, I was met with silence as he stared at the graphs. We went out and not only called on each but put into place not one but two salespeople to work these accounts. His sales rose 20% in less than a year.
Do you know how you stack up with others in your industry? How do you know if you are gaining on competitors or losing to them? Just because youâ€™ve had a few good years doesnâ€™t mean others havenâ€™t had even better. Itâ€™s a little like a publicly-traded company comparing itself to the performance of an S&P benchmark. This can be difficult information to find and sometimes must be interpreted and massaged a bit to draw accurate comparisons. A strong financial advisor can turn those charts and graphs into a picture that quickly leads you to where you need to be drawing your attention.
The kingpin of all abuses in financial management is the hockey-stick projection. Nearly every business or business unit I have ever seen believes it can grow by 20% per year forever. There should be at least 1,000 Googleâ€™s out there by now by my projection.
It is simply not a good practice to take the projections of your sales team for the next year and plug them into your model and call it a business plan. Your sales force is going to tell you what you want to hear. It is also not acceptable to take last yearâ€™s financials and add 5% to all expenses and then back into what you need for sales to support that. Your accountant is likely to be too conservative. You must be able to develop objective, realistic goals for sales, margins, overhead and cash flow that are transparent and supported by data and strategies. Anything else is simply a hope and a prayer and your lender will quickly let you know and send you back to do your work.
As you prepare your ownership transition plan it is critical that you have an accurate understanding of the value of your business. This can only be done if you have accurate financial statements that can be relied upon to complete a valuation. That valuation can become the basis for finding the value drivers in your business and to maximize those drivers. It is also critical that you have accurate expectations of business value so that you can plan your strategy for ownership transition accordingly.
The information is there folks. You simply need someone to help you to quickly and efficiently analyze it to find major opportunities that are waiting for you. You may as well pick up that loose change and increase the value of your business in the process so that you can set up your ownership transition on YOUR TERMS!