You often hear about how many businesses fail within the first year of start up. The issues often focus on a lack of affordable human capital, increasing debt obligations, and a lack of financial capital as well. Though at times these risk factors could be mitigated with more attention to detail. I might be a blogger by night, but I’m a corporate finance executive by day, and as such I know the importance of finance analysis when it involves running a business. You can’t be successful if you don’t know what money is coming in versus what money is going out, and the general purpose for your overall cash flow.
First and foremost, if you don’t create a monthly income statement (P&L statement) make sure that is the first thing you do. This is a snapshot in time of the income your business is bringing in. It should also highlight any expenses you are incurring, and even compartimentalize them as well (i.e. selling versus manufacturing epenses). Once you start doing this on a regular basis you can begin to visualize trends and analyze why certain expenses are high one month over others. Not to mention this will be you consistent visibility into how much money you are making, or not making, as the months go on.
A balance sheet is another vital piece of financial reporting that should be completed on a monthly basis. This is a rolling view of your available cash, assets, and liabilities associated with your company at any given time. This is especially important because it illustrates working capital, which is necessary to any successful business. It also allows you to monitor any debt obligations you have, both short and long term. Any good financial manager keeps a watchful eye over his balance sheet each month.
Cash flow statements are quite important as well, though they often fall to the wayside of financial analysis. The term “cash is king” has been a popular saying for many years, and for good reason. Since the economic fallout in 2009 many companies put most of their emphasis on cash flow, since actual money is what is necessary to meet payroll and to satisfy debt obligations. Companies with sufficient liquidity can survive economic storms of the past and last long enough to find a successful path forward.
Please keep in mind that if you want to start and maintain a successful business then strong financial analysis is key to that success.