6 Questions Every Business Owner Should Ask

Inventor Albert Einstein is famously credited for saying, “It’s not that I’m so smart, but I stay with the questions much longer.” Companies that are deliberate in asking the right questions, and drilling down on the tough answers will have greater success in reaching sustainable financial health and long-term business success. You cannot lead what you do not know. B2B CFO® has created a short list of critical questions that most owners may not know but should. This article will allow you and your management team to gain clarity around these important questions.

1. Do I have the right financial systems and processes in place to support my growing business?
   When you first launched your business, you may have managed your books on your own or hired a bookkeeper. As the business scales and expands, your financial management needs to expand as well. Take stock of your current systems. One goal of financial management is to maximize profits. There are two ways to do this—increase revenue and reduce costs. Your systems and processes need to monitor each area of your business to give you accurate and timely information about pricing, the cost of goods sold, and inventory. Ensure you have expert financial reporting with timely creation and distribution of monthly, quarterly, and annual financial reports. This also includes the filing and payment of taxes and other fees. The right financial systems also include expert planning and forecasting to boost the efficiency and profitability of the business today and in the future. Your systems and processes should be able to alert you to various financial risks or fraud that can harm the company’s cash flow, profits, and reputation. Managing taxes, cash flow, expenses, profits, KPIs, pricing, and costs are all part of the complex puzzle of proper financial management.

2. How much capital do I need to properly fund my business?
   Calculating this figure takes a bit of number crunching and understanding your future goals, but it is crucial that you properly estimate your cash requirements for the near future. First, estimate your future revenue and expenses to develop at least a 12-month forecast of net profit/loss. This analysis should take into consideration the Key Performance Indicators (KPIs) that drive your business to support your revenue and expense assumptions.  Next, create a cash flow forecast by taking into consideration the expected timing of receipt of your projected revenue and the timing of payment of your projected expenses from your 12-month forecast. Timing is essentially the difference between reporting net profit/loss and cash flow. Between projected earnings and projected cash balances over the next 12 months, you are now armed with an estimate of your capital requirements.
3. How do I speed up the collection of my receivables?
   Timely collection of outstanding receivables is a requirement if you want to avoid cash flow difficulty. Customers should be invoiced as soon as possible after services are performed or products have been shipped. Actively manage accounts receivable with established collection policies. Consider creating a consistent collection process when an invoice becomes overdue. You can offer special terms or set a policy of collecting a deposit/ down payment if possible. Be sure your customer collection terms are in sync with your suppliers’ and vendors’ credit terms.For specific customers and situations, consider incentivizing with discounts. Offer your customers a reduced rate when they pay their invoices early. Lastly, get it in writing. To clarify your payment policies or deposit requests, ask your customers to sign a contract or approve an estimate that clearly outlines payment details.

4. What KPIs/metrics should I use to measure the health of my business?
   Many business owners try to manage their business by only reviewing their P&Ls to assess the company’s bottom line: net income. This is helpful, particularly if you perform period-over- period comparisons to identify trends in certain revenue and expense items. However, it is also important to identify and track the relevant KPIs for your industry. For example, entertainment streaming companies and software companies may establish their forecasts and track their performance by measuring the number of new subscribers secured each month, quarter or year.Another example would be an airline that keeps an eye on the number of flight hours achieved every month, or cost per flight hour. Learn your industry KPIs, decide which ones are relevant for your business, and track them on a daily or monthly basis. B2B CFO® has expertise in almost every industry to assist you in identifying your relevant KPIs and can provide a benchmarking of your business against your peers in your geographical area.

5. What financial reports should I be reviewing?
   The following financial reports will help you gauge your company’s financial performance:The Balance Sheet is a financial statement summarizing a company’s total assets (current, non-current, and intangible assets), liabilities, and shareholders’ equity at a specific point in time, usually at the end of an accounting period. It provides a snapshot of a company’s financial position, including the economic resources the company owns and owes.

   Income Statement or P&L is used to evaluate profitability and to provide clarity on costs that directly relate to the provision and sale of products and services versus costs of indirect support functions.  A consistent trend of gross profit and net income are necessary to have a viable and valuable company.

   The Cash Flow Statement summarizes all cash inflows and cash outflows of a business. It includes operating, financing, and investing activities and indicates which areas of the business are generating and using the most cash.

   The Accounts Receivable (A/R) Aging Report categorizes outstanding accounts receivable into groups based on the due date of the invoice, typically current, as well as 1-30, 31-60, 61-90, and > 90 days overdue.

   Budget vs. Actual Report is a comparison of actual results, primarily from the Income Statement, against the budgeted amounts that were projected at the beginning of the period. It will help you assess how closely the company’s spending and revenue generation meet the financial forecasting projections included in the budget.

6. When Is the Right time to Sell My Business?
   Selling a business involves careful planning and strategic considerations. Timing is also key as economic, political, and competitive drivers will also influence the sale and the sale price of a business. The right time to sell your business depends on your personal and financial goals and whether unforeseen circumstances are forcing you to sell. If you have time to thoroughly plan and engage with trusted advisors, our experts always advise you to start the process of building value at least 3 years in advance. Review your financial statements, including income statements, balance sheets, and cash flow projections to make sure they are timely, clean, and accurate. Transparency and accuracy are crucial for potential buyers. Seek professional valuation services to assess both tangible and intangible assets accurately. Avoid overpricing or undervaluing your business. An expert valuation provider can help conduct a fair market assessment and appraise your business. Take steps to streamline your business operations to enhance efficiency and maximize value. Buyers appreciate well-run businesses. Always conduct a comprehensive review of legal and regulatory compliance and address any outstanding legal issues to mitigate risks. These are some of the initial steps to  take when considering the timing of a business sale.

If you should have additional questions or need guidance on managing any of these key points, please reach out to B2B CFO®. We are dedicated to improving the lives of business owners with strategic financial and business advisory services on an as need basis.  Email me at PeggyHead@b2bcfo.com.