What is your balance sheet going to look like next year? The year after? What about three years from now? Do you care? Many times the answers to these questions are: not sure, no idea, don’t know and yes I care but I don’t have the information to properly answer these questions. It’s very typical for a small or medium sized business to not know what their financial statements are projected to look like over the coming year much less the next three years. Many times they will have a budget (that is usually inconsistent with their historical performance) but haven’t done the work to take the budget one step further and have it flow into an actual set of pro forma financial statements.
What are pro forma financial statements and why do they matter?
Do you know what your business owns and owes? Do you know what your business makes and spends? More importantly – do you know what the equity is in your business or what it might be worth? It’s typical for an entrepreneur or for someone running a business to say “yes I know what we make and spend” but unlikely that they know what they own/owe and what the equity in their business is or what the value might be. Small and medium sized businesses can be so focused on surviving that they often don’t take time to see if the needle is moving in the right direction with respect to the equity or value of their business. This is unfortunate because one of the very reason businesses are started is to build value and one day be able to cash in or have that value recognized.
So where is the best place to start if you can relate to this?
I chatted this morning with Calgary based consultant and CA, Brad Celmainis about small business finance. Brad is an accountant with a great personality who thrives on helping small businesses. In addition to being somewhat of an Instagram celebrity (click here for his account) Brad specializes as a contract CFO and/or controller. We chatted about some basic finance topics that every small business owner should consider including why a balance sheet is so important to review on a regular basis and clean-up as necessary. Brad drew a comparison based on his experience that many business owners treat a balance sheet like a junk drawer or a garage – lots of items in there but no one really knows what they are.
This comes up often with small business owners – what is your business worth today? Many small business owners don’t usually have a clear answer or even an idea of how to value what they are building. I thought I would share some basic information about how to answer this question for those business owners that may just need a little bit of guidance.
In working with a client recently, we were discussing their projections for the current year because they are looking to payout some higher interest debt on their balance sheet with less expensive debt that they thought might be available from a bank. As we went through the math it became obvious to them that their projections were not going to be enough to meet the requirements of the bank. As I sat with them going through some of the options, I thought I would share one of the easiest methods a business can use to sharpen up its numbers and make a better presentation to a bank. Continue reading “But what if our business doesn’t make enough money?”→