Understand The Financials Of Your Business!Mar 24, 2022
Financials are the most important recorded metrics when it comes to playing the game of business, they are your scorecard and can also act as a guide when things are going right, wrong or when minor adjustments need to be made.
However you need to know what to look for and how to interpret this information, too often I see people look at financials and just boring spreadsheets or tedious jobs they hire accountants or CFOs to take care of.
If you care about succeeding in business you need to get passionate about financials and start looking at them as the story that is being told about your business or the businesses you want to buy or roll-up.
So, let's go over the two key financial statements that make up the "financials" of your business.
P&L (Income Statement)
Just mastering these 2 will allow you to use them as inputs for more advanced concepts such as forecasting, budgeting, and growth and hiring plans.
How often are you checking your financial statements?
Are you looking at your statements once a week, once a month, or just once oper year when you need to file taxes?
Put simply, the more often you record, update and review your key financial statements the more dialed in you will be to the inner workings of your business and the performance of your business decisions.
What is your process when it comes to making adjustments?
When these financial statements come back, what is your process for interpreting and making adjustments within your business?
First of all, you need to understand the ins and outs of what you are looking at, secondly, you need to formulate as best you can a process for making adjustments within your business based on the financial performance of those decisions.
For example, I have seen a number of businesses greatly increase their revenue by reviewing the process of following up on accounts receivable. It is a highly valuable skill to be able to close the deal, both one time and for ongoing business.
This responsibility should not be left to your accountant or PA (unless they are trained and skilled in doing so).
When businesses transfer this role to someone with more of a sales background and provide the right incentive structure, I've seen it do wonders for the bottom line in many businesses.
If you want to grow a large company (even one day go public) you need to look at the financials the same way public companies do.
When companies announce their earnings it is one of the most important days for their stock price, the marketing will punish you if the projections don't match the performance or if the budget was overrun. The thing is, it works the same but to an even higher degree in the smaller, nonpublic market.
Small businesses are valued at 3-5x their yearly profits, so every dollar you make (or lose) your valuation moves up or down $3-5. Think kind of leverage should make you prick your ears up and become aware of the importance of your financial scorecards.
The Key Metric: RPP (Revenue Per Employee)
One of the most important metrics when it comes to growth and scaling effectively is Revenue Per Employee.
The best companies in the world such as Google, Netflix, and Amazon have astronomically high RPP, (Sometimes over $1M).
If your business falls below 50-100K it becomes almost impossible to scale because you are simply not making enough money relative to what you pay your employees. Meaning you can grow and take on more people, but...
I would argue it's a resounding "No"
These are some of the key considerations that need to be understood and applied, we go into granular detail on each of these and many more in our flagship program Acquisitions University.
We teach these concepts on the pretext of going out and acquiring your first or even multiple businesses in your first year, however, these concepts are just as valuable to anyone currently running their own business and potentially looking to grow via Acquisitions.
If you would like to apply to work with us, you are welcome to book a strategy session