How do financial statements help in decision-making

How do financial statements help in decision-making?

Most small business owners get started to serve customers and to do something they find fulfilling. Not many find that fulfillment in reading financial statements. Yet these statements not only tell them how they’re doing but also suggest actions to promote future success. They are a critical leadership tool to aide in decision making.

When trying to answer the question, how do financial statements help in decision-making, there are three financial statements that every small business owner should understand. They’re the income statement, the cash flow statement and the balance sheet. Here are some keys to using each for business decision-making.

Income Statement

It’s also known as the profit and loss statement, or simply the P&L. It shows all the revenue and expense for a specific time period, be it a month, a quarter or a year.

It reads from top to bottom. Revenue is the top line, net profit is the bottom line, and different types of expenses and intermediate totals are in between, as follows:

  • Revenue – Cost of Goods Sold (COGS) = Gross Profit.
  • Gross Profit – Selling, General and Administrative Expenses (SG&A) = Operating Income.
  • Operating Income – Interest = Pre-Tax Income.
  • Pre-Tax Income – Taxes = After-Tax Income or Net Profit, aka the bottom line.

While everyone talks about the bottom line, the most fruitful places to make changes are near the top of the sheet.

  • Increasing revenue improves numbers all down the line.
  • Decreasing COGS means finding lower prices for inventory and reducing manufacturing costs.
  • SG&A can be minimized by actions such as reducing utility and building expenses and targeting marketing campaigns effectively.

The last two expenses, interest and taxes, are areas where a business owner should consider consulting an expert for financial advice.

There are ratios that help a business owner gauge financial health.

  • Gross Profit Margin = Gross Profit / Total Revenue
  • Operating Profit Margin = Operating Income / Total Revenue
  • Net Profit Margin = Net Income / Total Revenue

Ratios vary by industry, so it’s hard to make broad statements about desirable numbers. A professional accountant can help benchmark these against industry norms.

Cash Flow Statement

In accrual accounting, income and expenses on the income statement don’t correspond to cash flowing in and out. For example, when a sale is made, the customer owes money and the income statement recognizes revenue. However, a business can’t spend that money until the customer actually pays.

The Cash Flow Statement shows how much money was generated from (or used in) operations and how that cash was used for investments and where it came from in the form of financing. Even with a healthy income statement, a lack of cash means trouble in the future.

There are two ways to calculate cash flow: direct and indirect.

A direct Cash Flow Statement shows changes in cash from three categories:

  • Operations: cash received for sales minus cash paid out for inventory, wages and other current expenses.
  • Investing Activities: cash spent for major capital expenditures minus cash received for retiring them.
  • Financing Activities: loaned money received minus interest on loans.

The direct method is straightforward but requires keeping track of every dollar received or spent.

The indirect method starts with net income from the income statement. It then subtracts any factor that added to net income but didn’t produce cash (e.g., an increase in accounts receivable). It adds anything that’s subtracted from net income but didn’t reduce cash (e.g. a decrease in accounts receivables).

If cash flow is low or varies greatly from period to period, the business should take action to improve it.

Balance Sheet

A balance sheet lists the company’s assets and liabilities.

Assets and liabilities are classified as current and non-current. Current includes cash, receivables, inventory, and debts due within a year. Non-current includes building, major equipment, and long-term loans.

A healthy company has more assets than liabilities.

Assets minus liabilities equals the third category on the balance sheet, retained earnings. This is the amount of money that has been earned and reinvested. Net profits for the income statement are added to retained earnings.

The current ratio is current assets divided by current liabilities. There’s also a quick ratio, which is like the current ratio but excludes inventory from the assets. If this is greater than one, the company can meet its short-term obligations.

The balance sheet also shows whether a company has enough overall assets to cover long-term debt.

Interpreting Financial Statements

A savvy business owner can learn much from the 3 financial statements, and a knowledgeable partner such as Avisar Chartered Professional Accountants can really unlock the statements and show a business how to improve its financial position. Avisar specializes in taxes, statements, and consulting for small businesses, entrepreneurs and non-profits.

Read our Guide to Understanding Financial Statements for Business Owners for more on how to make the most of your financial statements.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

financial statement accuracy

How To Review Financial Statements For Accuracy: 5 Timely Tips

As a business owner, you make a lot of decisions based on your financial statements. You track revenue and plan expenses, often to decide how much take-home pay makes sense for you or whether you can afford more inventory or equipment upgrades.

Your financial statements must be accurate to rely on them. We’re going to walk you through how to review financial statements for accuracy.

Keep Up with Your Financial Statements

One of the best ways to ensure your financial statements are accurate is to keep up with them regularly. While creating an annual balance sheet or income statement is a good start, developing monthly updates to your financial statements is much better.

Creating and reviewing financial statements will help you pinpoint concern areas before they cause problems. Being familiar with your balance sheet, for example, will help you determine if something looks a little off. Without that familiarity, you might not realize when something has been misapplied or forgotten altogether. In some cases this can lead to trouble with the CRA when filing.

Review Your Balance Sheet for Red Flags

Your balance sheet provides a snapshot of your business at a specific point in time. Being familiar with your balance sheet will help you spot red flags. Some of the most common concern areas include the following:

  • Misapplied Payments. If you received a payment from a customer but applied it to the wrong account (or something similar), your balance sheet on an individual customer account is going to look a little off. Look at individual customer accounts for negative balances to help correct this type of error.
  • Increasing Debt-to-Credit Ratios. A debt-to-credit ratio shows how much debt you have compared to the amount of assets you have. While a rising debt-to-credit ratio might not always signify a mistake, it can give you an indication of the health of your overall company. Huge fluctuations in this ratio can indicate something was not recorded correctly.
  • The Balance Sheet Doesn’t Balance. Perhaps the biggest red flag is that the balance sheet simply doesn’t balance. In fact, that is the purpose of the balance sheet—to ensure that assets equal liabilities plus net worth.

Review Your Income Statement With Your Cash Flow Statement

While your income statement and cash flow statement report different information, they can and should be reviewed together. Having a high-profit number on your income statement with a low cash flow statement doesn’t really make sense. When these numbers are not in sync, that could indicate a problem with the earnings that are being reported.

How to review financial statements for accuracy
Income statements and cash flow statements should be reviewed together.

Unpredictable Reports

Your reports really should be somewhat similar from month to month. When there are huge, unexplainable swings from month to month, there are likely errors that you need to address. Finding them can be difficult, but having month-sized portions to review rather than entire years can be very helpful to start this process.

Get an Accountant and Work With Them Regularly

Having a third party review your books and records can be extremely valuable. An accountant will be able to take a hard look at patterns and reported numbers to determine where there might be concerns. In addition, if you have your own in-house bookkeeping, having an outside accountant review everything provides a valuable second set of eyes to help spot mistakes.

Need help ensuring your financial statement are accurate? Speak with an Avisar advisor or consider one of our packages with coaching.

Ready to learn more about how to review financial statements for accuracy? Read our free guide How to Read Financial Statements: A Guide for Business Owners.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Audit Firms in Canada

Top 3 Things to Look at in Financial Statements for Judging a Business’ Health

Judging how well (or poorly) a business is doing requires a robust understanding of the business’s financials. In a previous post we looked at the three different types of financial statements. In this post we’re going to show you what to look for in your financial statements to know if your business is successful or at risk.

Learn more about how to read and understand financial statements in How to Read Financial Statements: A Guide for Business Owners.

1. Balance Sheet

A balance sheet is essentially a snapshot of a business’s financial situation at a specific point in time. It shows assets, liabilities, and owner equity as they currently stand.

From these figures, you can determine whether a business owns or owes more. Although a single balance sheet provides an accounting at only one moment in time, the financial direction of a business becomes evident if you compare balance sheets across months, quarters, or years.

To see how solvent a business currently is, check its most recent balance sheets’ listed assets and liabilities. The business has positive equity if the assets are greater than the liabilities and has a negative balance if the liabilities are greater. (Owner equity should also be checked but is less commonly an issue.)

You can also see whether current assets (e.g., cash) are sufficient to cover current liabilities (usually due within one year). If they aren’t, the business could have cash flow issues in the coming months.

To see how a business is trending, compare its balance sheet to a previous one (e.g., a quarter or year ago). Asset growth shows that a business is either growing or investing in growth. You likewise can see whether liabilities are declining or increasing.

2. Profit & Loss Statement

An income statement (or profit and loss statement (P&L)) summarizes revenues and expenses over a period of time, usually a month, quarter, or year. Revenues are tabulated and expenses deducted, and the resulting balance reveals whether a business made or lost money during the period.

In the reporting, revenues and expenses are typically broken down into categories. Listing separate categories makes it easier to assess where a business has growth opportunities and/or is spending most of its money. Categories could include online sales, brick and mortar sales, types of products/services, facility costs, wages, inventory costs, and anything else that’s also relevant.

First, look at the overall P&L to assess a business’s general performance. For decision-making, however, check the revenues and expenses of specific categories. You can see whether they’re declining, stable or growing, and you can also see correlations between certain ones. For example, a growth in sales might necessitate higher employee compensation to meet the increased volume.

3. Cash Flow Statement

A cash flow statement converts the profit shown on the P&L to the actual cash generated (or used) from operations. It also shows the cash provided for or used from investing and financing activities.

For example, your P&L may include $100,000 in invoices not collected yet, including in accounts receivable.  On the Cash Flow Statement, this will be adjusted as a reduction of $100,000 from the profit shown on the P&L to reflect the actual cash earned.

Cross-reference the cash flow statement with the P&L. The trends of the P&L should continue on a cash flow statement, or there should be a good reason for a difference.

Assess a Business’s Financials

With these three reports, you can accurately assess a business’s financial situation. Compile the reports to check how your own business is doing, or request them as you evaluate one that you’re considering investing in.

It’s also important to be aware that these reports are only useful if all accounts are reconciled and they have been properly prepared considering accruals like revenue and A/P, and non-cash adjustments like amortization and tax expenses.

If you want help examining your financial statements, book a free consultation and we’d be happy to show you what your financial statements are telling you about your business.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

the three types of financial statements

What are the Three Types of Financial Statements?

The three core financial statements are the balance sheet, the income statement, and the cash flow statement. Each offers unique details about a business’ activities and together provide a comprehensive view of a company’s financial health and operating activities. We’re going to explain each and show you how these three types of financial statements all fit together.

The Balance Sheet

The first of the three types of financial statements is the balance sheet. The balance sheet provides a snapshot of a company’s financial position at a given point in time. It shows the company’s assets (what the company owns), liabilities (what it has borrowed), and shareholders’ equity (investment and retained earnings).

These numbers should balance each other out: Assets = Liabilities + Equity.

A balance sheet can be prepared daily, weekly, monthly, quarterly, or annually. Many small businesses prepare their balance sheets monthly, perhaps quarterly for smaller businesses.

Analysts can use a balance sheet to identify the health of a company using metrics such as the Current Ratio and Debt/Equity Ratio.

Ultimate guide to reading financial statements

The Income Statement

The income statement is sometimes called the Profit and Loss statement (or P&L). The income statement shows the revenue a company earns and the expenses involved in its operating activities.

The difference between revenue and expenses represents the company’s net profit for a given period of time.

It does this by showing the sales revenue at the top and then deducting direct and indirect expenses.

Direct expenses are your cost of goods sold (COGS). This provides us with gross profit. Indirect expenses include operating expenses (salaries, administrative expenses, research and development, etc.) and secondary activity expenses such as interest paid on loans taxes.

The result is a company’s net income.

Net income at the end of a period becomes part of the shareholders’ equity feeding the balance sheet. Net income is also carried over to the cash flow statement

When analyzing the income statement, you should be looking at the company’s profitability using key ratios like gross margin, operating margin, and net margin as well as tax ratio efficiency and interest coverage.

The Cash Flow Statement

A cash flow statement shows how much cash enters and leaves your business over a set period of time. It begins with the net income from the income statement and subtracts any non-cash expenses.

The cash flow statement shows cash coming and going out of the business in three categories:

  • Operating: Including revenue, expenses, gains, losses, and other costs.
  • Investing: Debt and equity purchases and sales; purchases of property, plant, and equipment; and collection of principal on debt, etc.
  • Financing: Including paying or securing long-term loans, sale of company shares, and payment of dividends.

The cash flow statement shows the change in cash per period, as well as the beginning balance and ending balance of cash.

Now that you have an overview of the three types of financial statements, let’s look at how they fit together to give you a really clear picture of the state of your business. This diagram from the Corporate Finance Institute does a good job of illustrating the similarities and differences between the three types of financial statements, and showing you where they intersect:

 Income StatementBalance SheetCash Flow
TimePeriod of timeA point of timePeriod of time
PurposeProfitabilityFinancial PositionCash Movements
MeasuresRevenue, expenses, profitabilityAssets, liabilities, shareholders’ equityIncreases and decreases in cash
Starting PointRevenueCash balanceNet income
Ending pointNet incomeRetained earningsCash balance
Source: The Corporate Finance Institute

Learn more about how to read and understand the three types of financial statements in How to Read Financial Statements: A Guide for Business Owners.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

measuring customer profitability

Measuring Customer Profitability: 3 Tips Businesses Should Know

If you’re a business owner, you know how valuable a good customer can be—as well as how draining a bad one can be. How can small businesses measure and identify their most profitable customers to attract more of them? Below, we’ll discuss some tips and tricks for measuring customer profitability and how you can use these metrics to grow your business.

What Is Customer Profitability?

You may assume that your most profitable customers are simply those who spend the most money with you. However, this isn’t all that goes into profit—you’ll also need to consider the costs associated with the customer relationship. When measuring customer profitability, consider customers who are high-maintenance and use a disproportionate amount of your employees’ time or who tend to return items more often than other customers. They may be less profitable than lower-maintenance customers who spend a bit less. Some particularly difficult customers may even be costing you money. 

There are a variety of software programs designed to help assess profitability based on your business’s unique metrics. A Chartered Professional Accountant (CPA) can help you evaluate the data these programs generate giving you insights on the allocation of resources and productivity; however, there are some slightly lower-tech ways to measure customer profitability, which we’ll discuss below.

Measuring Customer Profitability: Three Tips

Identify Your Customer Contact Channels

Before you can see what’s working and what isn’t, you’ll need to identify each of the potential ways in which a customer can interact with your company. Do you have a website? Social media pages? A public email address? Storefronts? A call centre? Unless you’re tracking the levels of engagement through all of these potential customer interaction channels, you could be missing key pieces of data that may inform your customer profitability analysis.

Once you’ve identified these channels, you can then evaluate the costs associated with each. These can include: 

  • Advertising and marketing costs
  • Infrastructure expenses (rent, utilities, real estate taxes)
  • Shipping costs
  • Return, refund, and restocking costs

Define Your Customer Categories

Many businesses tend to have customer segments that are clearly defined. For example, there are few daycare customers who aren’t parents of young children—but assessing customer categories for retail and department stores can be trickier, as these tend to attract a much broader range of demographics. 

However, business owners are uniquely positioned to define their customer categories, as you have first-hand knowledge of your business, your products, and your general impressions of who’s spending money (and who isn’t) at your business. Some questions to ask yourself include:

  • What types of customers do you see? 
  • Is your “typical customer” different at different times of the day? (For example, some businesses tend to see more students in the afternoon and early evening, while retirees may make up the bulk of customers from 9 to 5 on weekdays.) 
  • What motivates your customers to purchase from you?
  • Who is your competition? Do your customers tend to be loyal to one business or simply patronize whoever is most convenient at the time?
  • Which categories of customers tend to interact with your staff the most?

With this information in hand, you can begin to do some calculations for measuring customer profitability. 

Begin Tracking and Logging Key Performance Indicators (KPIs) 

Some profitability KPIs you’ll want to measure and track when measuring customer profitability can include: 

  • Average revenue per user (ARPU), calculated by dividing the total revenue by the total number of customers or subscribers.
  • Customer lifetime value (CLV), which projects the entire net profit that will be generated from a customer over the course of their relationship with your business. You can calculate CLV by multiplying the annual profit per customer by the average number of years they’ll stay a customer, then subtracting the initial cost of acquiring this customer. 
  • Customer acquisition cost. Your customer acquisition cost (CAC) is quite simply how much money it costs you to acquire a new customer. It typically includes the cost of your sales and marketing activities. If you want to be accurate when measuring customer profitability, you need to know this number. The formula to calculate CAC is: (Cost of Sales + Cost of Marketing & Advertising) / New Customers Acquired

Some of this data may not be readily accessible. But by thinking about these calculations, you can brainstorm ways to collect and track this information, whether this means investing in some marketing tools or creating an employee loyalty program that can track spending patterns.

Partnering with a CPA can give you access to an even broader range of potential KPI tools for measuring customer profitability approach. For more tips on measuring profitability download The Ultimate Small Business Profitability Checklist, our free guide to help you measure and manage the profitability of your business.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

measuring profitability

Measuring Profitability in Your Business: 7 Key Ratios

Measuring profitability in a business is essential to understanding how well it’s running. From measuring minor operational changes to exiting via sale, understanding what your business’s bottom line truly means is the only way to accurately determine its value. If you run a business, here’s an overview of how to measure profitability.

How To Measure Profitability

Knowing your business’s numbers is foundational to assessing profitability. Inaccurate figures will lead to inaccurate conclusions. Don’t go with what you think the business makes and spends, and don’t use what you expect future sales and expenses to be. Use hard data from the past months or years — yes, you need to keep accurate records — to gain a true understanding of your business.

There are multiple numbers that every business owner should know. Here are a few of the more important ones related to measuring profitability:

  • Gross Revenues
  • Net Income
  • Cost of Goods Sold (COGS)
  • Operating Expenses
  • Other Income
  • Taxes

An accountant can help you calculate these, so long as you have the necessary records. Because records are so important, it’s generally advisable to hire a bookkeeper or accountant as soon as you start a business (or now if you already have a business).

Measuring Profitability: Key Ratios

Your gross revenues show the top-line income that your business makes, and net income generally shows how much the business actually earns after expenses. These figures become even more important to measuring profitability when put in the context of profitability ratios, though.

There are multiple profitability ratios that show how much a business earns with respect to different underlying costs. Some of the most common ratios are:

  • Gross Profit: Gross profit measures how profitable your goods/services are to sell. It puts the earnings in perspective to the cost of those goods, and the best way to improve this is to either raise prices or find lower-cost suppliers. 

Formula: Gross Profit = Revenue – Cost of Goods Sold

  • Operating Profit: Operating profit provides a more complete picture, as it takes into account the cost of goods sold plus how much it costs to run your business. This can be improved by bettering the gross profit or reducing operating expenses.

    Formula: Operating Profit = Gross Profit – Operating Costs
  • Pre-tax Profit: Pre-tax profit gives a complete view of your business’s profitability before the government gets its share via taxes, taking into account any other income and any non-operational expenses. The ratio will be improved by any positive change to sales, sourcing, operations, or almost any other aspect of your business.

    Formula: Pre-tax Profit = Operating Profit – Non-Operating Expenses
  • Net Profit: Net profit shows exactly how much money your business is making after everything is taken into account. Any change in revenues or expenses will impact this.

    Formula: Net Profit = Pre-tax Profit – Taxes

These profitability ratios are even more informative when used to calculate other ratios that look at returns. Most people use net profit when showing how to calculate profitability ratios that are more advanced:

  • Return on Investment: ROI is most useful when assessing whether a major investment in a business is financially advisable. You may use this when determining whether to purchase another business or when considering expanding operations. The ratio shows what sort of return you’ll receive from the outlay.

    Formula: ROI = Net Profit / Initial Investment
  • Return on Assets: ROA looks specifically at the tangible assets a business has to determine how well they’re deployed. You can use this when evaluating a major capital outlay or assessing the use of existing infrastructure/equipment. Unlike ROI, ROA will change more over time as the value of assets fluctuates with additional purchases and depreciation.

    Formula: ROA = Net Profit / Assets’ Total Value
  • Return on Equity: ROE is most often used to evaluate business profitability from a shareholder perspective. The ratio shows how much shareholders are earning. Improving profitability, rebuying equity, and issuing new equity will all impact this.

    Formula: ROE = Net Profit / Equity Investments

Each of these three ratios can be multiplied by 100 for a percentage.

For more tips on measuring profitability check out The Ultimate Small Business Profitability Checklist. It provides five key metrics you should know and be watching to understand your profitability.

Download a free copy here and get started measuring profitability in your business.

Work With a Knowledgeable Accountant

Evaluating profitability can be challenging even when you know how to calculate it via these various ratios. Working with a knowledgeable accountant who knows how to measure profitability will give you the confidence necessary to make informed business decisions. Book a free consultation if you’d like assistance determining how profitable your business is and where profits might be improved.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

small business growth

The 5 Stages of Small Business Growth

While small businesses come in all shapes and sizes, almost every business goes through the same five stages from inception to late-stage growth, according to researchers Neil Churchill and Virginia Lewis. In analyzing the lifecycle of businesses, the two researchers uncovered a pattern showing small businesses go through five stages as they mature and grow.

While the length of time a small business stays in any one phase changes business-to-business, within each stage, organizations show remarkable similarities and characteristics that allow them to move to the next stage. Understanding the stages can help you identify where your business is and what to do to move up the ladder. Let’s explore.

SMALL BUSINESS GROWTH STAGE I: EXISTENCE

The small business growth journey begins at its inception. As small businesses come into existence, their focus is primarily on attracting customers and delivering the goods or services to fulfill transactions.

Organizations at this stage are fairly loose and simple. The owner or founders typically do a bit of everything and supervise subordinates directly. While there may be a formal business plan, the strategy aims to generate enough revenue to be viable.

Quality, production, and processes may be unstable until those in the business start to gain experience. With most small businesses, the owner is the company and drives both strategy and execution.

20% of small businesses never get past this stage and fail within the first year of existence. Another 30% close their doors by the end of the second year. Those that survive evolve into the second stage: survival.

SMALL BUSINESS GROWTH STAGE II: SURVIVAL

As small businesses enter the second stage, they have demonstrated viability. It is attracting and retaining enough customers and generating enough cash flow to survive in the short term.

The organization remains small, although there may now be a few managers focusing on sales or operations at the direction of the owner or founder. The owner still makes nearly every key decision, and the goal remains survival.

Many companies stall at this point. They may earn marginal returns based on their capital and time investment. Many Mom-and-Pop businesses stay in existence but never thrive beyond the survival stage — eventually closing or selling, often at a loss. Conversely, businesses that grow in profitability and develop a strong cash flow to finance growth move onto the third stage: success.

To ensure your business moves onto the next stage, it’s important to work with an advisor to have a strategic plan in place.

SMALL BUSINESS GROWTH STAGE III: SUCCESS

If your business has reached the third stage, congratulations on your small business growth. There’s a lot to celebrate. There are also important questions to ask. Do you want to:

  • keep the company fairly small with stable and predictable profitability?
  • expand and grow your business for greater profitability (but also at greater risk)?
  • step back and pursue other interests or investments while the business continues?

These are questions you should ask yourself and your accountant or business advisor to ensure you have the right plan in place to achieve your goal.

Companies can remain at the success stage for long periods and earn average or above-average returns. In this stage, businesses are more likely to survive economic downturns or shifting consumer demands.

In this stage, companies typically start to add additional executives or oversight, such as a controller. Middle managers may be necessary to drive operations. Financial, sales, marketing, and production systems run more smoothly and are better defined.

Companies willing to take on additional risk, and additional debt, strive to enter the fourth stage: take off.

SMALL BUSINESS GROWTH STAGE IV: TAKE-OFF

If the business is the fire, financing is the accelerant. To turn a business from success to take-off, owners and founders focus on raising capital and fueling growth. Owners and founders begin to delegate more and allow managers and other executives to begin to take a more active role in strategy and higher-level decision-making.

Organizations often begin to decentralize. Formal organizational charts are developed with clear lines of report and hierarchies.

This is a pivotal stage in the business lifecycle. If leaders rise to the challenge, significant growth can occur. If not, the business can stall at this stage, too. Many companies sell before achieving their take-off goals, although at this stage they usually sell for a profit.

If you’re entering this stage of small business growth, you may want to explore your options to restructure your business or sell your business with a strategic partner.

If take-off happens, it’s time to enter the final stage: resource maturity.

SMALL BUSINESS GROWTH STAGE V: RESOURCE MATURITY

As companies enter the fifth stage of growing a small business, they need to be concerned about control and consolidation of rapid growth. The business may need to expand rapidly to accommodate the growth and meet consumer needs.  The organization may struggle to retain the entrepreneurial spirit that drove growth in the first place.

In this stage, the company has the financial resources to fund detailed strategic and operational planning. Management runs fairly independently and key positions are staffed by experienced workers. Systems are refined and smooth. Owners and founders are often detached from the business both financially and operationally.

As businesses reach resource maturity, profitability may flatten but be sustainable and more predictable. Yet, many businesses will lose sight of their original mission, stray too far outside their product offerings, or take unnecessary risks to chase even larger growth.

A DELICATE BALANCING ACT

Throughout every stage, it’s a delicate balancing act. For those that can move through the stages, the rewards can be great. However, it takes a careful and strategic growth plan at each stage and the ability to evolve and adapt as the business grows.

Ready to talk about where you are on the small business growth chart and how to best position your business for success? Book a free consultation and speak with one of our experts.

We work with businesses across all of these stages, helping them grow to the next stage or stay put, making the most of the stage they are in. It all depends on your priorities. We work hard to understand your business needs and help you manage risk, meet reporting obligations and plan strategically for growth.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Why Is Bay Street Soaring As Main Street Suffers?

Despite one million Canadians being out of work since the pandemic took hold and while small businesses struggle to pay the rent and stay in business, how is it that Canadian stocks almost broke even for 2020?

The answer is “easy money.” Monetary authorities around the world, including the Bank of Canada, have cut interest rates and enhanced liquidity to financial markets to support economic activity and stem further economic impacts related to COVID-19.

While the rhetoric of Bank of Canada officials and politicians has focused on how these actions will support small businesses and Canadian workers, the reality is that a big chunk of the provided liquidity has found its way into financial markets, and financial assets have grown as a result. The outcome is a bifurcation between the real economy (Main Street) and financial markets (Bay Street).

Stock Markets

Canadian and U.S. stocks rallied back strong from the depths of the pandemic in March (all data to Oct 30, 2020, total returns, in Canadian dollars). Canadian stocks rose 49% from trough to peak (meaning from their lowest level reached to their highest, which took place during the time span from late March to mid-August) and ended down 9% overall for 2020, to date. In the U.S., stocks rose 40% from trough to peak and are positive 4% for 2020, to date.

Markets will likely continue to be volatile amid ongoing concerns related to COVID-19. Nevertheless, companies in North America have begun to report their third quarter 2020 operating performance, and the vast majority of companies are doing much better than expected.

In addition, the economy in both Canada and the United States is recovering from shutdowns in early 2020 at a much faster rate than most market participants expected. This strong performance should provide a supportive backstop to any continued uncertainty stemming from COVID-19 in the months to come.

Bond Markets

Bonds were flat in the third quarter of 2020. Policymakers in Canada and in most other developed market economies have eased monetary policy in response to COVID-19, to combat concerns about financial market liquidity and credit. Credit spreads, an indicator of investor risk sentiment, have recently decreased, signalling that investors are becoming more comfortable with corporate lending despite the ongoing economic headwinds posed by COVID-19.

Credit conditions should continue to improve as policymakers spare no expense to talk down interest rates and use their central bank accounts to enhance market liquidity.

Canadian Dollar

The Canadian loonie has been on quite a rollercoaster ride this year so far. In the first quarter of 2020, the loonie depreciated about 9% versus the U.S. greenback, with the perceived safety of the American dollar attracting investors in the face of COVID-19 uncertainty. Since the end of March, with its exposure to economically sensitive commodity prices (such as energy), the loonie has come roaring back. This is in part because investors became more aggressive on seeing economic impacts of COVID-19 becoming less dire.

Market performance (as of October 30, 2020, total returns in CAD$, rounded. Data source: Refinitiv Eikon)

MarketDecline % (Feb 20 to Mar 23)Recovery % (Mar 23 to Aug 26)Q3 2020 % (Jul to Sep)2020 Year to Date % (to Oct 30)
Canadian Equity (S&P/TSX Composite Index via XIC ETF)-37+49+4-9
U.S. Equity (S&P 500 Index via XUS ETF)-27+40+7+4
International Equity (MSCI EAFE Index via XEF ETF)-26+29+4-6
Canadian Fixed Income (FTSE TMX Canada Universe Bond Index via XBB ETF)-7+110+5
U.S. Fixed Income (Bloomberg Barclays U.S. Aggregate Bond Index TR Index via AGG ETF in C$)+7-40+7
Currency Exchange Rate (USD$ in CAD$)-9+10+2-3

Investing wisely during these market conditionsWith COVID-19 entering its second wave, elevated uncertainty continues to weigh on financial markets. Although we cannot control financial market fluctuations, we can control your financial plan and individual investment strategy. By focusing on this plan and strategy long term, you will see a materially larger impact on your financial success than you would by worrying and speculating on short-term market events.

Disclaimer:

BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.

Authors:

Federal government support related to COVID-19: Tax implications you can expect in 2020              Susan Cox, CPA, CA

Things you need to know when it comes to U.S. taxes for individuals: General filing requirement       Cyndy Packard Osode, CPA, CA, CPA (TX, USA), CGMA

GIC versus GIC … What’s the difference? Time and money!                                                        Adam McHenry, CFA

Why is Bay Street soaring, while Main Street suffers?                                                                 Adam McHenry, CFA

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.