Michael Pazzani
Whether you’re a founder at a growing startup thinking about a Series A financing, or an executive team looking to capitalize on the business you’ve built over the last 10 years, there’s one foundational thing you should prioritize this year if you want to take your company to the next level: accurate historical and projected financials.
Regardless of size or stage, the companies that grow faster and stronger understand the value of clean financial statements.
Having your financial house in order allows internal and external parties to analyze and understand what’s happened in the past and what’s expected for the future. Both perspectives facilitate informed financial decisions and produce positive outcomes.
With that in mind, we’ve prepared a list of 4 things you should be thinking about to get the financial year started off right:
1. Finish Your 2020 Monthly Financial Forecast
Give your forecast a gut check by seeing how many of these questions you can answer: How much revenue does your organization anticipate producing in 2020? Is it more or less than last year? Why? What are the expected gross profit margins? EBITDA margins? How much in accounts receivable will you have in 6 months? Why?
A healthy forecast will track all this information, supported with clearly defined assumptions and drivers. For example, if you aren’t profitable, your forecast should be able to demonstrate when, how, and why you will be profitable in the future. Planning on tripling revenue this year? Great! Is that because you’re expanding the customer base? Raising prices? It’s important to show what’s behind your financial story – otherwise it can come across like you’re pulling numbers out of thin air. When your forecast is finalized, make sure you haven’t neglected your balance sheet and cash flow statement. These 3 financial statements exist for a reason. They are all intertwined and each one makes up one piece of the entire financial puzzle.
2. Know Your Past, Present and Future Target Financial Ratios
Financial ratio analysis can be a powerful tool to understand and evaluate the performance of your business. There are five broad categories of financial ratios: activity, liquidity, solvency, profitability, and valuation. Your operating industry, financial goals and capital structure will dictate which ratios are more significant for your business. Comparing ratios over time can produce a meaningful evaluation of performance and also assess the impacts of previous operating or financial decisions. A clear understanding of this information contributes to better strategic decision making and goal setting.
3. Analyze Your Capital Structure
Do you have the right mix of equity and debt? Are you considering taking on new financing this year? Are there financing options available to produce a lower cost of capital and match your current business assets? The optimum funding for your business depends on many factors but includes how much capital you need, what stage your business is at, and whether (and at what price) you’re willing to sell part of your business in return for capital. Your capital structure also affects the business's risk profile, the cash flows available to stakeholders, and consequently, the returns achieved by those stakeholders – so achieving the right balance is critical.
4. Calculate, and Track, Your Cash Metrics
The phrase “cash is king” never gets old and neither should tracking important cash barometers such as your burn rate, breakeven point and cash conversion cycle. If you’re a CPG/DTC company, knowing how your inventory, accounts receivable and accounts payable decisions impact your cash position is critical for pinpointing improvement areas. If you’re an early-stage VC backed firm, tracking important cash related metrics, like burn rate and breakeven, will be essential to address investors’ renewed emphasis on profitability.
Healthy financials serve as a guide to keep you focused on the right initiatives, priorities and investments for the year. They also serve as a resource to help you course-correct quickly if performance starts slipping. Not sure where to start to get your financial house in order or looking for an objective assessment to identify areas that may need support or improvement? We’re here to help!