This course was created by EntrepreneurNOW. We are please to offer this training in our library.
- Why do investors care about the P&L?
- Red flags that investors look for
- Arriving at a realistic net revenue
- Identifying an appropriate gross margin target
- Including operating expenses?
- Gross margin vs. operating margin
Skill Level Beginner
- And now, we're ready for our cash flow statement. Cash flow statement is wildly important because for one main reason, if you run out of cash, you're essentially out of business. So, you have to make sure that you manage the statement very closely. You should be looking at it as you're operating your business literally every month to make sure that you have enough money in the business. Now, all this statement basically does is take your inflows minus your outflows, meaning, essentially all the cash that's coming into the business minus all the cash that's going out. But it also takes into account one very important thing which is any investments or bank loans that actually come into the business as well. And that might be very important in order for you to fund your business. Now, one of the things I love to look at in this statement is what I call max negative cash flow. Max negative cash flow is your lowest point of cash flow that you need in the business. So, as you're looking at the statement, you actually want to scan the bottom line to say what is my max negative cash flow? When does cash get the lowest in my business? Meaning, does it go negative, and if it goes negative, what is that number? That's going to tell you the minimum amount of money that you actually need to have invested in your business in order to execute the business plan? Again, this is very important, so we have to make sure that we actually understand this, right? So, as you're looking at the business and you look at these numbers, you're going to see a dip in cash. If it stays positive the entire time, you don't need to worry. You may actually not need an investment. But as it dips down below the positive line to the negative line, that's going to tell you how much money you actually need for investment. And then what you do is you have to go out, get your business funded, and then once you get it funded, put it in the investment line item. And you can now look at the model in total. So, one thing I want to make you aware of is that our model, the one that we're using here today, assumes that all revenue converts into cash in the same month, and all expenses are paid in the month that they're incurred. Now, that might sound a little bit technical, but what we wanted to do is keep the model very simple. If you need a more sophisticated model, not to worry. We actually have one. All you need to do is contact us and we can actually send it out to you. And we can walk you through a little bit more about how that works. So, you might wonder, we done all this sophisticated planning. And you wonder, well, with all this great planning why do businesses run out of money? Well, typically they're too aggressive. They're too optimistic, so they forecasted way too much revenue. So, they go and they spend all that money and they don't get the revenue. The revenue doesn't come in. That's usually why people run out of money or why businesses run out of money. Now, here's where the fun begin. 'Cause now you get an opportunity to fine-tune the model. So, here's what I recommend. When you're doing forecasting, you've done all this work to create this initial model. But I really want you to fine-tune and play around with the model and try different assumptions, different numbers. So, what I want you to do is actually save off a copy of this model that you've already done, your initial model, so you don't mess around with it, and then actually open up a new version of the model and start to play around with it. Start to try different assumptions. Try different numbers. Start to fine-tune things that seemed a little bit odd or that somebody might question in the model or something that seems off to you in some way. So, you might do things like increase revenue assumptions or maybe hold off in some expenses if in fact your business is burning too much cash. So, if you're burning too much cash, you're running out of money, the business doesn't look very good, then we can go ahead and we can model something different, okay? So, now we have to make sure that it's justified, but we can do that. You might have the opposite scenario where instead of you're burning cash too fast, you actually are making way too much money. And the first thing you say is Ken, I'm making a boatload of money. This model looks amazing. But then, when somebody looks at it, they go this looks unrealistic. This is too good to be true. You actually don't want to put a model forth that looks so good to be true that it's not believable. So, you've got to make sure that your model is believable. In in that, you might want to take a look at this model and start increasing expenses. Start spending more money to ensure that you're going to make sure that you make the revenue numbers. Or you might want to just pad expenses. I've done this before. I actually produced models before that revenue just looked so good, it was too much. People wouldn't believe it.