In this week’s episode, David and Eric discuss Financial Analysis. We had more to day on this topic than we realized – it may be the new series!

Before diving into any specifics – How well do business owners or managers need to know their numbers? How well do they need to be able to analyze their number?

You don’t need to know your numbers as well as your CPA or CFO, but you do need to know your numbers when someone speaks to you about the topic. For example: say it’s a banker and you’re trying to raise money right now or investor and when they ask you questions like what your gross margin is, why is it trending this way or that way – you say I don’t know, let me call my finance person. That answer can take away your credibility. When it comes to the key components of your numbers like revenue, cash flow, or operating margin…. These are the basic fundamental accounting aspects of your business.

First, start with the historic financials. You can lineup the columns by months (at least the last 12 months- powerful with the last 24 months) of income statements and balance sheets. You’ve just finished step one and are now looking at a time series. When you look at the periods side-by-side you start seeing things move across them. Ultimately what a financial analysis is doing – is it’s telling the story.

If you’re a business owner you don’t need to know how to build a cashflow statement from an income statement and balance sheet, but you do need to understand there is a thing called a cash flow statement and it’s very critical. One of the first places to look at is operating cash flow. A business can last a long time with negative profit but cannot last very long with negative operating cash flow. We have a guest next week who we think you are going to love. Then we’ll resume this them with some more advanced metrics and how to look into the future.