Many entrepreneurs are so busy getting their businesses up and running that they give little thought to expanding or selling. But having a viable growth and exit strategy in place should be part of your company’s overall plan. Especially since being prepared when opportunity knocks, is often the best way to profit from your business investment.
Why You Need Investor-Ready Financials
Every business owner will leave their empire eventually. And if you’ve been successful in growing your company, chances are good it will be worth more than it was when you started.
Exit strategies are plans for getting your money out of what you’ve worked so hard to create. But while there are many departure tactics to choose from – including selling your company, or closing its doors outright – these tend to work best when you understand your company’s financial situation.
Even with a strategy in place, the best-laid plans can sometimes be pre-empted. The day may simply come when you’re presented with a business offer you just can’t refuse. Whether it represents an infusion of new capital, or an acquisition proposal, ensuring your financials are investor-ready will help you take advantage of whatever comes your way.
Buyers and backers look at a wide range of factors when sizing up a potential investment. Some of these include:
- how successful your business is in generating new customers (its acquisition rate),
- how well it hangs onto the customers it attracts (its churn rate), and
- how much of a personal investment you’ve made in your company – both in sweat and financial equity
All of these elements are important, but the very first thing an investor will want to see are the numbers on your financial statements. Customers may be key in terms of business longevity, but a great deal of your company’s value hinges on whether or not you’re turning a profit!
Is Your Business Making Money?
Surprisingly, many business owners are fooled into thinking they’re making money when they’re not. The fact is that just because your sales are generous or steady, it doesn’t mean your venture is profitable.
Your revenue – the money that flows into your business from selling your products or services – only tells one side of the story. To determine your net profit you also have to look at what’s left over once your expenses – the money that flows out of your business - have been paid.
Some of the other factors that go into determining the financial viability of your business include:
- how much money you’re making (your profit margin), and
- whether your sales are trending upwards
Questions like these can be answered by comparing your company’s income statements year-over-year. And in both cases, the more positive the growth, the better.
Evaluating Your Debt Load
Investor-ready financials don’t end with a great track record of income and profits. Even the most lucrative enterprise will suffer eventually if it doesn’t keep a lid on its spending. How much debt your business carries – coupled with its ability to service that debt effectively – can be as revealing as your sales when it comes to predicting long-term success.
A quick glance at your company’s balance sheet will show you how much your business owns (its assets) versus how much it owes (its liabilities). And if you divide your current assets by your current liabilities, you’ll get a rough idea of your debt situation.
When this calculation – known as the current ratio - yields a result of “1”, it means the monetary value of your debt obligations is equal to the value of your business possessions. The bigger the number from there, the better positioned your company is to keep its debt load under control.
But remember: you can’t make loan payments or fund your company’s weekly payroll with money that’s tied up in accounts receivable or inventory. Every business needs to keep a certain amount of cash on hand, and cash flow is especially critical when it comes to managing:
- your sustainability,
- your growth, and
- the ability to deal with unexpected financial circumstances
In fact, maintaining a positive cash flow is one of the most important predictors of business success!
Even if achieving a solid return on the time, money, and effort you’ve invested in your business remains a work in progress, understanding where you stand financially will help you to see exactly where the “break-even” lies. More than that, working closely with your accounting professional – and the financial statements they generate for you – is the best way to keep your business investor-ready in terms of promising new prospects. And that’s important. Because the most lucrative opportunities are often the ones that come along when you least expect them.
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