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As humans, we tend to focus our attention on the things that bring us the most pleasure and least pain. It is probably no wonder that most entrepreneurs and emerging companies tend to focus on daily tasks and projects which bring them joy, have the least amount of resistance and sometimes make them money. However, the key to business growth comes in the ability to be a storyteller and the main character in that story is financials.
You could have an idea and be pre-revenue, generating just enough to cover your burn rate each month, or you could be a profitable business and looking for capital to grow. Regardless of where you are, the importance of financials does not change.
Christine Sing, principal at Rehmann’s Ann Arbor, Michigan office, offers words of wisdom when it comes to having your financials in order:
“I know full well that few entrepreneurs start a new business because they love keeping their financial statements in order,” Sing said. “Friends, it is a necessary evil and a critical business discipline to springboard your company to the next level. Please take this seriously, your business is counting on you!”
Here are the top four reasons to have your financials in order:
1) Financials are the price of admission
Whether you like it or not, you are going to get asked for them. Startups will need projections, which are a forward-looking version of your financials based on a series of assumptions for the purposes of pricing a round of funding. For any venture capital or more traditional funding, including SBA loans, you are going to need to illustrate the state of your business and your financials are the truest picture of this.
2) Financial statements are the language of business and the balance sheet is the thermometer
Quite often being able to speak into the listening ear of an investor or funding source is one of the key aspects of communicating effectively. The ability to provide financials with accurate information is similar to being able to present a business opportunity or write a proposal that is easy to understand with proper grammar and punctuation. When you can demonstrate you can speak the native language of business to your funding source, they will gain more comfort with your business.
3) Cash is king
Understanding how you make money and where you are making it from is important to your conversations with investors. At the end of the day, cash flow is important and your ability to identify key metrics in your business financials is an important part of the process. Your ability to understand how you will generate cash for the business to cover expenses and ultimately generate a profit for the investment, is critical to any conversation.
4) Know your margins
Do you know what the margins are for your business? For every dollar that comes in, what percentage goes to what aspect of your business? Are you able to allocate funds to the various aspects of your operations and at what percentage to the total revenue? Ultimately knowing your revenue minus direct cost will give you an idea of how profitable you can be. Your company’s profitability provides the answer to how an investor is going to get paid back and what the return on an investment is.
The ability to track a dollar as it travels through your business is one of the best ways to be able to tell your story to a funding source. When you can demonstrate that you understand how to attract a customer, deliver your products or services, generate a profit into your bank account and demonstrate the margins along the way in financial documents, you have mastered the keys to having your financials in order.