Let me give you the basic premise if you don’t. Entrepreneurs and inventors present their ideas to a panel of investors. They are then grilled about their business (or lack thereof) and then investors bid for investment in the business. Sometimes you see an amazing deal made – and sometimes the entrepreneur walks away with nothing.
One of the biggest “red flags” is when an entrepreneur doesn’t know his/her numbers. Here they are, in front of big-dollar investors asking for large investments and they don’t have a handle on how their business performs on important financial measures.
This is no different than any other business leader –whether you are looking for an investor or not.
As I work with my clients, I often see that they manage their accounts based on the number in their bank balance. They cannot tell you what they spend on marketing and what the return is. They don’t have ratios for measuring their COGS, supplies, or other variable expenses.
The numbers are not there for the IRS or to know how much money you made. The numbers exist for you to know how to improve your business from the inside and increase your profit.
The key is understanding your P&L and your Cash Flow Statement. Make sure you know the difference between the two and how to review both of them.
If you already know what they mean, review them. Often.