The basis of all things

We all know the horror stories of successful entrepreneurs who ended up going bankrupt… businesses with such a promising future! In recent years, more and more of them have spoken out publicly about their “failure.” Some of them have been clear about the lessons they learned and the importance of having a better understanding of their financial situation.

Unfortunately, many entrepreneurs do not pay attention to their financial situation. "And yet it is the essential basis for the growth of their business," explains Samuel. "Having sound management of your operations and understanding the basics, the macro, is fundamental." No need to excel: you can surround yourself according to each person's fields of expertise, but you must have a minimum of understanding to be able to navigate, with a clear mind, alongside your accountant or financial partners. The one who leads the boat must know where he is going.

“Entrepreneurs are not required to understand all the financial jargon, but they are required to have both hands on the steering wheel,” adds Mélanie. “Understanding and carefully monitoring your financial statements makes a big difference!” She also points out that when she no longer receives news from her clients or financial statements on a regular basis, it is sometimes a sign of bad news.

"Financial statements are like the dashboard of a car," the analyst illustrates. "If you don't know if you have enough gas (or battery life), or how fast you're going, or which exit to take, and you don't have a mirror, then there's obviously a greater risk of having an accident, going off the road, in other words, going bankrupt."

Financial statements: what are they for?

As has been said, the entrepreneur must be able to integrate financial or accounting concepts at a minimum if he wants to be able to see his results, establish trends, read signals, seek out useful information, make informed decisions, compare himself from one period to another, and even anticipate the unexpected and be able to seize all the opportunities that arise on his path. This is his dashboard.

It is also a question of credibility with investors and financial partners. An entrepreneur who has mastered his figures will certainly be more credible and will inspire more confidence in his financial backers. In addition to demonstrating the seriousness of the entrepreneur, the financial statements attest to his ability (or not) to raise additional capital to carry out a project.

Financial statements are inseparable from the lender's assessment of profitability and interpretation of risks. "They guide us. They sometimes turn on red lights, which allows us to identify the issues to work on, and that's perfect," reassures Mélanie. Entrepreneurs are often embarrassed or uncomfortable. But transparency in their affairs is precisely what allows us to better support them, in a human and personalized way.

For example, some people underestimate their financial needs and end up with unpleasant surprises, so we do the opposite and go back to basics to establish the right hourly rate based on the potential billable hours. For others, expectations are too high compared to market dynamics, or the expenses have not all been thought through and included. We don't want to "burst anyone's bubble", on the contrary! Asking the right questions allows the entrepreneur to become aware of all the dynamics themselves and to be able to realize their dream in a viable way. What actions can you take to achieve your goal in 3, 4 or 5 years? We are able to offer the best solutions for everyone based on their business model, sector, stage of development, and realities. Each journey is different.

Here are the three things lenders always look at:

Liquidity and cash flow : Does the company have enough liquidity to ensure the sound management of its operations in the short term? Is it able to pay its employees, its suppliers, all of its operating expenses, while waiting to be paid by its customers? It is often said " cash flow is king!"

Ability to cover debts : Are profit margins sufficient to cover debts? Is the company generating enough profit to meet its commitments to its creditors?

Leverage : What is the ratio between debt and the real equity of the organization? Does the company have the capacity to raise additional sums if needed? Is its capitalization attractive?

Finally understand your financial statements!

"Even though we no longer see shoeboxes filled with jumbled invoices during our company visits and most rely on a third party to do the bookkeeping and produce financial statements, it is important to understand and follow everything properly," says Mélanie.

Financial statements include the balance sheet and the income statement. The first provides a look at assets and liabilities, as well as the owner's assets (equity). The second looks at revenues (sales) and expenses, to determine net income. They are an overall picture of the company's financial situation.

Financial statements may also include a third document: the statement of cash flows, which shows the cash flows attributable to the company's three key activities during a given financial year (usually one year). It includes cash movements associated with (1) operating activities, (2) financing activities, and (3) investing activities.

To help entrepreneurs see things more clearly and finally understand financial jargon, Evol has developed, in collaboration with the École des entrepreneurs du Québec, a series of training capsules on the subject. "Financial management, your ally" posted on the Evol website includes several educational capsules grouped into 4 modules of approximately 45 minutes each.

"In any case, there is no magic formula. You have to be diligent, rigorous and have budgetary discipline! Validating the figures punctually is essential. Once a year is not enough. Some people look at them every week. As a general rule, seeing your results monthly or quarterly provides sufficient insight."

Demystifying financial statements and understanding the foundation of financial literacy also makes you more confident in how you steer your business toward growth. Because financial statements are, after all, the showcase of your dreams to come true.