You go to work on your business, every day, because it’s your passion. You know the ins and outs of what you do and what your company does. You know what you want to achieve, but do you know the hard facts about your business — the essential financial information that reveals your business’s potential or what it’s really worth?
All investors or lenders ask revealing questions (like those on ABC’s Shark Tank) to measure a business and its potential earning power. As a business owner or CEO, you should be prepared to know the answer to the same questions an investor would ask.
Without the answers to these questions, it’s impossible…
…to understand your company’s earning potential.
…to foresee future challenges.
…to make informed decisions that will boost revenue and foster growth.
Whether pitching to investors or not.
Could You Answer These Questions, If Your Business Depended on It? Because Its Future Does
1. What Are Your Sales?
This is always the first question; sales are the most important vital sign of your business. First of all, do you have any? Your sales indicate whether the market has demonstrated proven demand for your service, product, or experience.
Next, ask yourself how many sales you have. Sales provide a measure of how relevant and/or unique your business is. Sales can also help you monitor your marketing efforts, revealing how efficiently you’ve managed to acquire customers.
When assessing your sales, it’s not just about the numbers. You should also look carefully at trends. Did your business generate more revenue this quarter than during the last three months? Consider why sales are the same or why they are trending positively or negatively.
Sales trends can indicate:
- a growing or slowing business
- successful or unsuccessful marketing or branding
- the consequence of a leadership decision
- a shifting market
- changes with your competitors
Watch out for seasonal sales trends. Before you panic over a slow quarter or celebrate a drastic uptick in sales, take a look at sales performance over the same period of the previous year.
2. Are You Pricing Right?
The next question to ask yourself is how much you’re charging. Take a look at your pricing model and consider whether your profits could be improved with a different pricing structure.
Pricing is usually not a one-size-fits all solution. If you’re charging your biggest clients the same as your smallest clients, you might be losing money.
Service businesses often benefit from subscription-based pricing models, rather than time or service-based pricing.
To analyze your pricing, you’ll need to use time tracking and job costing to calculate an accurate cost of goods sold for different jobs, services, projects, customers, and products. Use time-driven activity-based job costing to determine whether you’re pricing each job right. Then make the necessary changes to optimize pricing.
3. What Are Your Profit Margins?
Killer sales don’t necessarily translate to killer profits. On Shark Tank, investors get really excited about sales, and then they ask about margins.
Profit margins (gross profit margin and contribution margin) indicate whether you can afford to cover payroll, cost of goods sold, or overhead costs. Profit margins reveal if your business can break even, whether it’s turning a profit, and whether it can withstand increasing expenses. Margins also indicate whether you have money for reinvestment, debt payment, or investor payouts.
Take a look at your profit and loss statements by customer, employee, department, location, or by job. Calculate profit margins at a minute level to determine the most and least profitable portions of your business.
4. Who Are Your Customers?
Investors also want to know who your customers are, how you find them, and how much it costs to acquire them? This is essential information for business owners and CEOs, too.
The answers to these questions can be determined by calculating your customer acquisition costs. Take this question a step further with a second important key performance indicator: customer lifetime value. Looking at both metrics will reveal whether you’re spending too much or if you can afford to shell out more to attract customers.
5. Is Your Business Scalable?
In business, everyone wants a piece of the pie. For an investor (or you) to make money, your business has to be a pretty big pie or have the potential to become one. This is the final question on our list: How much growth potential does your business have?
Whether you currently have enough free cash flow (pure profit) to afford growth or not, you should always be looking for opportunities for future growth. Think about how you can expand your business with reinvestment, research, and development once you have the resources.
First, evaluate the market size and your current market share. Can you grow by acquiring more customers? If so, you must determine how you’ll manage to earn additional market share away from your competitors. Can you offer additional products, services, or new pricing models to differentiate your business from the competition? Perhaps you can open more locations or expand to another region.
Answer with Confidence and Financial Intelligence
If you have the right systems in place and accurate financial information at your fingertips, you’ll have complete financial transparency. You’ll be able to answer all of these questions and more with ease. You can lead your company with financial intelligence and business acumen, rather than with instincts alone. It takes a strong sense of business acumen to understand the essential core of your business’s function and to lead with confidence and accuracy. Business acumen requires knowledge, experience, awareness, and financial savvy. A strong financial foundation will allow you to see both the big picture and the details of your business. Leverage the power of a strong back office to become a financially intelligent CEO or business owner.