Big Sky Economic Development News

Why Numbers Matter

Jun 15, 2021

By: Lorene Hintz | SBDC Regional Director


The bank wants financial projections. I’m not sure what they want, can you help me?”  That is a typical question that Small Business Development Center business advisors are asked on a weekly basis.  Most people don’t really know what numbers matter and who they matter to.

When looking for financing to open, expand, or purchase a business the “financials” provide information that creditors use to evaluate a company’s financial health and performance.

In the expansion or purchase of a business, the last three years of tax returns are used to assess past trends, profitability, the ability to digest growth, and take on additional debt.

On a start-up business, market research needs be done to estimate realistic numbers for your projected income and expense.

The numbers must show that the business had the capacity to pay back debt while making a profit.

Financial statements provide a picture of a business’s financial health, give insight into its performance, operations, and cash flow. They are essential for obtaining financing since they provide information about a company’s history of revenue, expenses, profitability, and debt.

 


Here are the 5 Accounts used to make up the financial statements:

  1. Revenues – Business income from selling your product/service
  2. Expenses – Money used to pay operations, buy goods/services
  3. Assets – Everything your business owns
  4. Liabilities – Everything your business owes/debt
  5. Equity – The difference between the Assets and Liabilities is the owners‘ portion of the business

 


INCOME STATEMENT | BALANCE SHEET

Many entrepreneurs and small business owners are “very good at their craft” but have not taken the time to understand the financial statement.  Below are two particularly important statements. These two statements are used to analysis the trends of the business, profitability, and owner’s equity.

  1. Profit and Loss or Income Statement cover a span of time (month, quarter, or year)
    • This shows your INCOME and EXPENSES
    • Sales – expenses = Profit or Loss
  2. Balance Sheet “snapshot” of a specific date
    • This shows what you OWN, what you OWE, and your NET WORTH
    • Assets = Liabilities + Equity
    • Tell the reader the status of the business on a particular date

 


BREAKEVEN

A question that might come up is, “Will my business break-even?”

Example: You have calculated your fixed costs of $500 on rent, $100 on utilities, and $400 salary totaling $1,000 of fixed costs.  The variable costs associated with producing the widget (your product) are raw material and labor.  Variable costs have been calculated at $3.00 a unit.  The widget sells for $5.00 each.  How much do you need to make to breakeven?

  • Break-Even (Profits are equal to the costs)
    • Fixed cost / (Price – Variable Costs) = Breakeven
    • $1,000 fixed / ($5.00 – $3.00) = 500 Units

 


CASH FLOW STATEMENT

Lastly, the statement that seems the most daunting to most entrepreneurs and small business owners is the Cash Flow Statement. The Cash Flow Statement is a measurement of how the company manages its cash.  It shows the curves of the industry, what months generate the most income, the categories of your expenses, how a loan payment will affect your cash, and the balance at the end of the month/year. The Cashflow spreadsheet is a tool to see if your business will make money and help you make good business decisions.

  • Cash Flow Statement
    • The monthly income/expense of the company by category
    • Shows the natural income curves of the industry
    • Shows the liquidity of the company over a specific period
    • Show how debt affects the current income/expense of the business

The cashflow spreadsheet is similar to a checkbook register. We like to have a positive balance in the bank account, so we deposit money (from sales), pay bills (expense) and at the end of the month we still want to have money in the bank (positive cash flow or a black bottom line.)

 


As a business advisor and previous retail business owner, I can help calculate your breakeven, estimate project income and expenses, evaluate the cashflow, and provide practical alternative options.

Whether you are starting, expanding, or purchasing an existing business, the SBDC Business Advisors can help you. We offer free one-on-one confidential consulting and provide tools to help you make good business decisions. To access these free services, go to: https://mtsbdc.ecenterdirect.com/signup