When you’re going to be starting to engage someone in helping them with their journey to becoming financially fit, I wonder how do you analyze or benchmark a person’s or maybe an entrepreneur’s financial fitness?
So the first thing I like to do when we’re working together is I usually ask them what they know about their finances. Most times they tell me they don’t know anything, which very quickly I find out it is not true. But the people are very lacking in self-confidence around that financial aspect. So just getting them talking about it. I like to look at the numbers.
I do an assessment using traditional financial ratios. I compare it to their performance year over year. I compare it to industry benchmarks and we talk through it and it gives us a really good opportunity to talk about number one: what are these financial statements? The one that most entrepreneurs may know is the income statement also called the profit and loss, P and L,
where you really have all your sales and then all of your expenses. That’s the one that most entrepreneurs take a peek at. The other one that’s very important is your balance sheet that shows all of the things that you own, all of your assets and all of the people you owe money to, and the equity or the funds you’ve built up in the business.
So explaining how those statements work and then–from an outsider’s perspective, very objective– how do they stack up according to those ratios? And the interesting thing is that while I’m talking about what I’m seeing, they’re able to fill in the gaps of the story of what was happening in the business because they knew how it felt.
If I start talking about liquidity, which is having cash to pay your bills, your short term obligations. And it’s a really formal term. They’ll remember that they had some cashflow challenges and things felt strained at that period of time when I’m talking about that in the numbers.
It’s really nice to see the analysis, then their story comes together because between the two of us, we can then build on their knowledge and help them start to see how the numbers can help them plan for future things in the business.