Financials

Understanding what your financial statements tell you is critical to managing your business through the pandemic. There are three main financial statements you need to know about:

Income Statement (also called Profit & Loss)

The Income Statement is what your business is doing during a period of time – usually a month or year. Starting with your total Sales for the period, subtracting your direct costs, as well as the overhead expenses incurred, leaving you with your Net Income. In summary, are you using the business assets to generate more income than it takes to provide the service or product? 

Balance Sheet

The Balance Sheet shows you what the business is made up of. In three parts, your business is made up of its Assets, its Liabilities, and its Equity. The ‘Balance’ part comes in when calculating the three – Assets are always equal to Liabilities + Equity. In other words, if you owe more than you have (Liabilities larger than Assets), you have negative Equity. 

The Cash produced by your Assets – the Net Income from your Income Statement – is used to increase Assets (buy new equipment, for example), decrease Liabilities (pay down debt), or pay out to Equity as a dividend. 

Cash Flow

In tight times, Cash is King. The last financial statement is a summary of the prior two, showing the ways cash has entered and exited your business through Operations, Investment, and Financing. 

The last three lines of the Cash Flow are the most important – the starting cash for every period, the change in cash during that period, and the cash you’ve got in the bank at the end – which becomes the starting cash point for the next period. Unlike the Income Statement or Balance Sheet, the Cash Flow lets you see the rolling changes in your Bank Account – and gives you the opportunity to make sure it stays above zero!

Every aspect of your business is reflected on the financial statements in one way – the dollar. Whether you like it or not, no business can survive – or thrive – without a stable financial model & clear path forward. Being able to weigh different decisions against how they’ll impact your bottom line lets you make an apples-to-apples comparison and confidently move forward, even in uncertain times. If you haven’t already, make an appointment with your CFO, Accountant, or SBDC Advisor to understand where you’ve been, where you are, and most importantly – where you’re going. 

It may feel like a daunting task, but the SBDC is here to help. A business advisor can help show you the value in knowing where you business stands, where you are going and confidently map out a future that is bright for your business.

REQUEST ADVISING

Understanding the three financial statements, and how they result in your ending cash position every month, is critical in planning your path forward. Every change you consider in navigating a post-COVID world results in changes to your Income Statement, Balance Sheet, and ultimately, Cash Flow. Building a financial model that reflects this helps you model out where you’re going and how you’ll get there.

For example, consider:

• Changing Markets – What accommodations need to be made to reach your customers? What additional Revenue Streams are available?
• Changing Layout – Are inventory adjustments necessary? New Furniture, Fixtures, or Equipment?
• Changing Financial Landscape – Are there loans or grants available? Deferments on payment or refinancing? 

Each of these changes can be analyzed and demonstrated in your projections, so you see the impact – both positive and negative – on your bottom line.

With a shifting world, understanding your price point and how to remain break-even (or better) is critical. Failing to react quickly can result in long-term damage. 

Simply put, a break-even point is the number of sales you need to make in a period to cover all associated costs, overhead, and (if you want) debt payments. 

As you make changes to your pricing, margins, and overhead, your break-even point will naturally change as well. Make sure you include a break-even analysis into any projections you build, so you can see the impact of those changes.

Then ask yourself – does my market segment & marketing approach generate enough sales to cover my break-even point? If not, what do I need to do differently? Existing under your break-even point is not sustainable!

All of the financial models and projections in the world don’t matter if you’re struggling to pay your bills on time. How can you predict what will happen six months from now if you’re worried about making payroll? Here are some simple things that may help:

• DO: Negotiate your terms. Vendors and customers alike understand that the current economy is like standing on sand – and that it’s not your fault. See if vendors will consider 30- or 60-day terms (even 15!), and offer customers early payment discounts. If you have contracts, ask for a larger percentage up front, or partial payments throughout the contract. 
• DON’T: Ignore the phone. If vendors are calling, it’s easy to let it ring through to voicemail – but communication is better. Understand they might be in a tight spot, and try to find a solution that will help you both survive. You are their customer; putting you out of business doesn’t help anyone. 
• DO: Keep critical vendors happy. Don’t push off a vendor you can’t do without just because someone else is louder – no one gets paid if you lose a critical supplier and have to shut down. Juggling is hard, but staying in business is the most important thing you can do until things settle.
• DON’T: Fall behind on accounting & data entry. It can feel like pushing paper around isn’t as important as keeping the business running, but lack of proper accounting can obfuscate an already confusing situation. Don’t shove those bills in the top drawer until they’re entered! Review an A/P report weekly and use it to decide who to pay… and who to call.
• DO: Find other sources of Cash. Old inventory, unused equipment, subleasing space – time to liquidate and find new efficiencies. That’s all cash you have, sitting there on the shelves or in the parking lot, but unusable. Does selling something for $0.75 on the dollar feel like you’re getting ripped off? Bankruptcy is worse; if you have to buy it back later at a higher price, well, at least you survived!
• DON’T: Use debt to pay debt. This is a slippery slope. The easier the money is, the more costly it will be – and predatory lenders will give you just enough rope… and a shovel. Stop digging. If you’re at the point where you’re truly out of cash, talk to your business advisor about your options.