How do you measure the health of
your business?
Unfortunately, business doctors
aren't a thing.
And if your business seems a little under
the weather, how do you know what
to do about it?
Today we're going to talk about financial
reporting and how you can use it to
give your business a little checkup.
No medical license required.
If you're more of a reader, check out
the article below and don't forget
to hit like and subscribe for the
rest of our series, "Ready, Set, Goals."
Whether you're franchising a
restaurant or you just opened the
world's tiniest online knitting
store, everyone can benefit from
financial reporting.
When you make a financial report,
you're using income statements, balance
sheets, and cash flow statements to
give you and your stakeholders, if you
have them, a heads up on whether your
business is getting all its fruits
and vegetables.
Use your financial report to get insight
into those important food groups.
Your break even point, which is
the level of sales you need to break
even for the month.
Breaking even is when your total
cost and total revenue are equal.
Your cash collections, which
can tell you if your business is
collecting enough cash to operate
the business.
Debt financing is if your business
is making enough money to repay
debts on time.
Combined, this information gives
you everything you need to pay your
taxes properly, attract investors,
make big decisions, and catch mistakes.
You know, the healthy functions
of a business.
But what types of financial
reports should you be running?
There are three main ones.
Number one, you've got your classic
balance sheet.
A balance sheet shows the company's
assets, liabilities, and equity as of
a specific date.
You can figure out your balance
with this simple equation: assets
minus liabilities equals equity.
Number two is going to be your
income statement.
This shows the company's revenues
and expenses for an accounting period.
You can determine your income by
calculating revenue minus expenses
equals net income.
And finally, you've got your cash
flow statement.
Naturally this shows the company's cash
inflows and outflows for a period of time.
Calculate this by adding your
beginning balance in cash plus net
changes in operating, investing, and
financing activities and you'll get your
ending cash balance.
Oh, don't worry.
We're not done yet.
Now that you know how to handle
calculations for a financial report,
we'll show you an objective way to
measure the health of your company.
They're called key performance
indicators or KPIs.
And they're an important part of
any business checkup.
Your first KPI is going to be your
gross profit margin.
This shows you how much of your revenue
is profit after you factor in expenses.
To get your gross profit margin, just
do revenue minus cost of goods sold
and then take that number and divide
it by revenue.
Boom.
The second KPI is one that's near
and dear to my heart: net profit.
Net profit is how much money you
have after you've paid all of your
bills and expenses.
In other words, just do total revenue
minus expenses to get your net profit.
Finally, there's current ratio.
That's how you determine if you have
enough money to fund a large purchase.
To find your current ratio, divide your
current assets by your current
liabilities.
Take note: if your current ratio is less
than 100%, you may not have enough cash
coming in to keep on top of your bills.
So it's good to check this one off there.
All right, I promised, I promise
I am done showing you equations.
Now let's put it all together and generate
a comprehensive financial analysis
that shows your potential investors
just how healthy your business is.
First, start with your
company overview.
So investors can understand who
you are and what your company does.
Second, dive into your investment
thesis, including positives and
negatives of your company.
Third, don't forget to cite your sources.
Fourth, note any significant financial
events that may have impacted your
company's finances.
Fifth, if you have one, include
your company's valuation, which
is an independently determined value
for your company.
Six, list risk factors that could
negatively affect your company's
valuation.
Seventh, include detailed results.
The financial reports from earlier will
help you here.
And finally, always, always recap.
That's it.
Don't be afraid to ask for help from a
financial analyst, an accountant,
or a bookkeeper.
Have you heard about QuickBooks Live?
Much like a great doctor, they can
help you monitor the health of
your business.