To understand how well your small business is doing, you need to know both how it’s doing on a particular time frame (e.g., every month and quarter) as well as how it’s doing overall (how much it is actually worth). If you’ve ever thought of selling your franchise, this really matters.
Getting a holistic picture of your business’s financial health is critical so that you’re not blindsided by bad news—you thought you were doing well because you had a great few months… but when you want to sell your franchise, you suddenly find out that it isn’t worth as much as you thought.
Think of it like going to the doctor. Maybe you haven’t gained weight in the past six months (yay!) and you think you’re in great shape. But if you look back since your early 20s, you’ve put on an extra 30 pounds and your blood pressure is too high. If you simply track your weight month to month, you only get a limited view. If you examine other factors and your health overall, you know that you need to make a few changes.
How to gauge what your business is really worth
Let’s discuss how we can look at the overall health of your business. To start, let’s look at the differences between income statements and balance sheets, and what you can learn from them.
An income statement is what most small business owners tend to look at most.
As you know, it shows you how much you’re bringing in (revenue) and how much you’re spending (expenses) over a specific time period (e.g., monthly or quarterly). There’s a bit more to it (for example, to be accurate you need to organize everything by categories) but that’s the gist.
The income statement shows you your bottom line, which is your revenue minus expenses—profit—during a specific period. It’s a great way to see the impact of certain costs (e.g., looking at your biggest expenses) on your bottom line.
But just knowing dollars in, dollars out, and what’s left over every month won’t tell you what your company is actually worth. To do that, you need your balance sheet to show you the big picture.
Using the balance sheet to get the big picture.
The balance sheets pulls together three things: what your business owns (assets like property, equipment and inventory); what it owes (liabilities including loans, expenses, payroll); and what’s left after liabilities (your equity as an owner).
In addition to tracking assets, liabilities and the resulting equity, the balance sheet shows the total worth of a company, not just how it’s doing on a particular time period (like the income statement).
Looking at both your income statement and balance sheet is super important. It can show you red flags, like the fact that perhaps your liabilities are higher than your assets. To a potential buyer of your franchise, that would show a weak financial position. But if you knew that because you were keeping up to date and accurate books, you could make important changes to put yourself in a better position.
The bottom line for small business owners who want to understand the true value of their business?
Start with your books. Keep your financials current and accurate. One of our clients recently told us that they immediately valued a business twice as much if its books were current and accurate. To investors or potential buyers, how you keep your books is a sign of how the business is valued.
Questions? Chat with one of our friendly franchise experts today: Call us at 720-213-8040 or click below to request a free consultation.
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