Are you afraid of your financials? Or at least, do you struggle to understand them? Rod Bristol was - until he discovered seven financial measurements that ultimately boosted his EBITDA and the multiple when he sold his business.
You know how big we are on data. So be forewarned when I float out this number, as it’s completely anecdotally based: 99.9% of entrepreneurs struggle with understanding how the financial aspects of business work. They struggle so much, they fear them.
That fear can be the difference between trudging along and getting nowhere, or building a million-dollar business like Rod Bristol did. This entrepreneur not only revised his approach to financials -- he soon made it his life’s passion.
Can Financials Be Easy...or at Least Fun?
Full disclosure before we proceed any further: Rod Bristol is the Executive Vice-President of Profit Mastery. But he was an entrepreneur when he discovered the program, just like I was.
Seven years ago, when I first met Rod, he talked about the importance of financials in growing and selling a printing or print-related business. I listened then, and today I still listen...because Rod has earned his stripes.
In 2007, he sold his own printing business, Sudden Printing. At the time, Sudden was pushing $5 million in retail sales with 19 locations. They’d also expanded into the commercial printing world.
As he told me in a recent interview, much of that success was based on the principles of Profit Mastery.
Top Line Similarities, Bottom Line Differences
Profit Mastery is a program developed by Steve LeFever. It trains business leaders on seven important areas of finance. Through a training methodology that’s both intelligent and fun (believe it), participants learn and master critical financial aspects of their business.
Why is this critical? To explain, Bristol used franchises as an example.
Many franchises will take their franchisee-operators to Profit Mastery for training. The franchisees all will be making a similar amount on the top line, but there will be big difference among their bottom line profits.
This can be attributed to a lack of understanding what is driving that bottom line. “What they really need to do is figure out where the business would be if they managed it better,” he said. “That’s what we help them discover.”
The Seven Steps to Understand Your Financials
So what are the critical financial areas for business owners, particularly if you’re trying to sell your business?
Profit Mastery teaches “Seven Steps to Business Success”, which are all based on feedback they’ve received from bankers who either loaned money to businesses, or were involved in the sale of a business.
In this in-depth interview, Bristol touches on some of the principles of Profit Mastery, including why a balance sheet is especially critical to printers with big iron on the printing floor. Listen to the interview, then read on to learn about the seven steps.
1. Plan properly
Too many entrepreneurs launch a business without proper planning. Your planning should include an overview of:
- What you’re going to do
- Who you’re going to serve
- What you’re going to charge them
- What level of sales growth will help you generate a profit
The reason why so many entrepreneurs go the franchise route is that this has already been done for them. It’s more problematic when you’re doing it yourself, specifically when it’s a new type of concept.
2. Monitor your financial position
Owners need to understand how to calculate the 14 ratios used to evaluate your financial success. These help you understand how well your business is operating both from a perspective of profitability, cash flow, and actual net worth.
You need to use tools, such as the Financial Roadmap pictured below, and a scorecard, to assess the financial status of your company. You can then compare your numbers to your industry peers to evaluate your performance, and determine what steps you need to improve.
Example of Financial Roadmap. Courtesy of Profit Mastery.
3. Know your break-even point
You must know your break-even point. Bristol alluded to the “contribution margin percentage” (which he explains in the audio interview earlier in the post) and how it’s critical when you’re driving profitability of your business to its maximum profit level.
You can use this to manage your variable and fixed costs, and determine what it takes to grow (or shrink) your business. For example, if your fixed costs go up $1, how many dollars of new revenue do you need to cover the new expense?
Graphic courtesy of Profit Mastery.
These are powerful management numbers. Once you know them, you can share them with the people in your organization who drive its profitability. It simplifies and cuts to the essence of what it takes to be profitable.
4. Understand your cash flow
Do you truly understand where your money is going, and how to control it? Bristol notes once this occurs, “the light bulbs go off.”
Cash flow involves understanding the short-term and long-term financial cycles that affect your business. You need to identify the key cash flow patterns, and how they impact your performance. It’s also important to delineate between net profit and cash flow.
Example of cash-flow budget. Graphic courtesy of Profit Mastery.
5. Realize your financial gap
Is it possible for sales to go up and still find yourself in a cash flow crunch? Absolutely. You have to understand what capital you need to grow your business, and the perils you face if you exceed your capital base. This is your “financial gap,” and you must identify it to determine the future asset needs for your company.
6. Deal with banks properly
How do you write a loan proposal? There is an art and a science to requesting money. Knowing what information to present, and why it matters, can move your proposal from the bottom of the stack to the top.
You must identify the different types of asset needs and match them to the means of financing. This includes understanding what specific sources can be used to repay specific types of debt, and identifying the proper debt structure for your company.
7. Plan for the transition
This is particularly important for business owners looking to sell their company. How do you retire if everything is tied up in the company? In particular, what type of valuation is particularly applicable to you?
Planning for the transition is something that begins long before your business is sold. It requires strategic moves, including the one we’ll illustrate next, that put you in a position to gain maximum value on the sale of your company.
The Last Three Years: Making Adjustments Before You Sell
As we noted earlier, Bristol sold his business successfully. That’s because he thoroughly understand step number 7. That includes taking a different approach if you’re considering selling your business.
“To prepare a business for sale, you need to run it differently the last 3 years,” Bristol said. “Now it’s time to demonstrate the business delivers cash.”
He recommends you put as much money back into the business as possible. The more cash you stockpile, the more attractive the business will be. “You’ll experience a greater return and a higher multiple,” he said. “The move will more than pay for itself.”
Self-Audit: Create Your Valuation Yourself
Once you complete Profit Mastery, you’ll have the ability to self-audit and conduct your own valuation.
It’s not as difficult as you might think, especially when you understand the key financial components. Many owners outsource their business valuations (we can perform that task for you too), and that’s fine.
However, you still need to understand the components that make up that valuation. And for that to happen, you have to improve yourself. “Do you have enough financial acumen to understand what’s happening inside your business?” Bristol asks.
Understanding what’s happening may not be the hardest part. The real challenge, Bristol attests, is finding the willpower to change your approach. “The hardest thing for a business owner is to do something different,” Bristol said.