When you start out, cash flow is king. However, over time you’ll start thinking about financial statements as well. There’s actually a ton of resources online about financial statements, which is great. But here’s the thing – if you understand financial statements, you’re in a much better position to know which levers to pull to impact them. And that’s the key – it’s not about knowing how to calculate this ratio or that ratio, it’s knowing what to do with that knowledge.
Using Financial Statements
When you first go online and read about financial statements (income statements, balance sheets, etc.) you get a surface-level view, pick up a few financial ratio formulas and away you go. The key, however, is in the application of this knowledge. If you understand financial statements you can:
- Guard against fraud
- Make financial plans proactively
- Understand which levers to pull to impact your financial outcomes
- Increase the value of your business prior to exit
Know Your Goals
What metrics matter most? Well, it depends on what your goals are, which is why it’s important to have a clear sense of what those are. If it’s growth, you might not care much about your debt/equity ratio as long as your YoY revenue numbers are popping. However, if you’re looking to exit, EBITDA and the value of that equity matter quite a bit more.
Using Financial Ratios
All those fancy ratios are designed to tell you things about your business. Understand these well and you’ll be in much better shape than if you just take your accountant’s word for it. For example, if you notice that your current ratio has been stable for six months but your cash ratio is getting worse, what does that tell you? Well, it tells you that either your inventories or your receivables are spiking relative to your cash. If it’s inventories and you don’t know why, that’s not good. If it’s receivables, find out who the culprits are and talk to them.
The same thing applies when it comes to understanding the difference between, say, EBIDTA and net income. EBIDTA is the basis on which your business will be valued, so maximizing that is important if you’re looking to exit. Net income matters to the taxman and if you’re not looking to exit, it’s all about minimizing your tax burden.
The key here is that there’s more to strategy than just delivering great service, marketing well and running a tight ship operationally. Understanding what your financial goals are and what tactics will help you achieve those goals requires at least a fundamental understanding of financial statements.
Want to learn more about MSP finance? Sign-up for our upcoming finance-focused webinar featuring Peter Melby, CEO of Greystone Technology, a globally recognized MSP, as he reveals how MSPs can reinvest and make money at the same time.