Most people know that the finances of a business are a critical in understanding the performance and sustainability of the enterprise. The problem with reports like the profit and loss and balance sheet is that they are all historical. In order to really understand how a business will perform you need to be able to develop a future projecting cashflow.
A number of years ago I was approached to invest in an online business. I was interested enough to show up to the meeting and hear the founders talk about what the business had been doing. I then asked to view the financial projections moving forward….they looked back at me blankly and asked, “What’s that?”
Developing a cashflows in Excel is a great way to help you really come to grips with what is really driving your business forward. Surprisingly, I’ve found that many business owners don’t actually appreciate the underlying metrics which underpin their businesses performance.
For example, I was looking into a business that after doing some quick analysis I concluded that the more it sold the greater the losses! This was obviously not a good situation! The margins were all wrong, the costs out of control and the business was being funded by client prepayments with no thought of delivery. This business was doomed unless drastic action was taken…..sadly, like 80% of start-ups it eventually failed....