Order in Chaos
Whenever I teach an in-person seminar, when I introduce financial statements to the group, I ask them to take about 10 minutes and just look at them. The goal is to come up with questions to ask about what the participant is seeing in the numbers.
What is interesting is how differently everyone approaches the task. Some people focus on trends, other percentages of sales and still others look at the total values assigned to each category.
The point is that everyone looks at financial statements with a different frame of mind. To the untrained eye, the numbers might look like chaos.
In fact most things in life look like chaos from an individual’s point of view. If you have ever watched a festival crowd from above, it looks like total anarchy and an unpredictable pattern of events converging upon itself. People cutting each other off. Walking at different speeds. Going seemingly nowhere—all at once.
Now put yourself in the crowd. You are a part of the chaos, but not without a plan. You know where you’re going. You have a destination in mind and your path is predictable. Your plan is the order among the chaos. Knowing that we can see the patterns emerge among the individuals.
That’s what happened to me. In 2008, I was running five different profit centers at one time. Each set a different individual at the same festival—my company. In order to see the patterns and make data-based decisions. I needed a plan. Something predictable to carve a path in the sea of numbers.
This is when I started using The Home Run Financial System—the set of calculations that make up "The 7 Minute Conversation."
I was able to find six calculations that “touched all the bases.” The calculations I chose use numbers from the Income Statement, Balance Sheet and the Cash Flow Statement, giving you a well-rounded view of any business.
In just 7 minutes per month, you can get a complete picture of any company’s financial position. If any of these elements were alarming, you quickly know where to look to find the problem.
Similarly, if they look good to you, just keep moving forward with trying to provide the best service possible to your clients.
Here is what the completed Home Run Line Up Worksheet would look like for a sample company. As you can see, there are plenty of problems for the management team to address. But this is where the magic of the Home Run Line Up kicks in.
As you read about each element, imagine you are having a conversation with your client about how to improve their company. You will find that the analysis is quick and very thorough.
Most of the 7 minutes is spent entering numbers into The Home Run Financial Spreadsheet. Here is what the user input tab looks like. Just enter 2+ periods. I like to use 3-5.
After entering the numbers, I then just read the analysis from "The 7 Minute Conversation" Tab on the Spreadsheet. It might sound a little like this.
1. Trends — Looks like Sales are down about $1m along with a decrease in Gross Profit of about $705k. I don’t like this trend because when gross profit is down, you have less money to spend. The good thing is you held Operating Expense flat, but the result is still a decrease in Net Profit of $101k.
2. Expense Control — There is a hard and fast rule with expense control. You should decrease operating expenses by the same amount as gross profit decreases. In your case, gross profit decreases by $750,000. My advice to you is decrease operating expenses by the same amount and you will regain your profitability.
3. Debt To Equity — Banks like to see this number at 2.5 or less. You’re at 1.33, meaning that for every dollar you put into the company, you let the bank put in an additional $1.33. This is good if you think you might need a loan this year.
4. EBITDA — Your current EBITDA is $311k. This might not mean much to you now, but if we decide to get a loan, knowing this number will get us in the ballpark of how much you might be able to borrow. Here is what your borrowing power is currently.
5. Mis-Matched Financing — Looks like your gross fixed asset increased, but I didn’t see a corresponding increase in use of cash or long-term debt. This leads me to believe you might have bought something you can depreciate with a credit card or your line of credit. What did you buy and how did you pay for it? It is important because you might be paying more interest than you need to be and our banker can help.
6. Cash Flow Activity Pattern – Like I have told you in the past, the cash flow statement is the tattle tale of your business. Here is what I know about your company looking at yours. You are using cash from operations and from sale of fixed assets to pay down debt or pay owners. Does that sound about right?
Seriously, "The 7 Minute Conversation" is that easy, and it all starts with the 6 calculations in The Home Run Financial System.
Benefits of Home Run Line Financial SystemThe Home Run Financial System will help you look at the financial health of any business in minutes. No one wants to devote the hours it can take to understand their business’s financial metrics.
But everyone can benefit from seeing their business through the eyes of the financials, in just a few minutes per month. After the first time you give this technique a try, you will have a better understanding of your company’s true financial position.
Now give it a try yourself and join me for a webinar on "The 7 Minute Conversation." In one hour, you will learn this technique, earn CPE and be given the spreadsheet I reference above to make your life easy.
For an in-depth look into how to implement this technique in your practice, read my book, "The 7 Minute Conversation."
After building a successful high growth hotel staffing company, Mike Milan ran into a severe cash flow problem where he maxed out his credit cards and took out a home equity loan so he could make payroll, while he was waiting to be paid by his clients. It was the stress and anxiety of this situation that propelled Mike into learning everything you could know about small business cash flow and become Cash Flow Mike.
After all, he was successful on paper, there just wasn’t any money in the bank. If you have ever lost sleep wondering if you would be able to pay bill or make payroll, The Clear Path To Cash Community Immersion Program is for you. Learn the secrets of cash flow and start building a lifestyle friendly business today.
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