For many PR firm owners and C-suite executives it’s often considered the management equivalent of getting root canal: Reading their balance sheet.
While a growing number of PR firm owners have gotten more comfortable with reading their balance sheet, there’s still a lot to be desired in terms of owners having a solid grasp for the numbers and how they correlate to the day-to-day operation. In a hypercompetitive business environment, that’s not sustainable, especially if you no longer treat your firm as a lifestyle business.
For starters, you should plan on monitoring your balance sheet and P&L financials at least monthly. You should check more frequently in critical periods, such as when clients billing decrease and past due receivables increase.
It may help if owners and C-suite execs view their balance sheet as the Rosetta Stone of their business: With proper decoding it shows your PR agency’s assets and liabilities, what it owns and what it owes. It also gives PR firm owners the Net Worth, which is critically important when the agency is bracing for a sale.
With that in mind, here’s a few tips for how to make your balance sheet work for you.
> Current assets. The “current assets” section of the balance sheet shows how much cash the firm has on hand, whether in a bank or other financial instruments. This amount is called “operating capital,” and typically indicates how much liquidity the company enjoys. These assets, which include the amount the company is keeping in reserve, directly influence the company’s ability to make an acquisition or to operate when net revenues are low. The amount of liquid reserves (e.g., cash, certificates of deposit, securities, etc.) your PR agency should maintain depends on both management’s comfort level and ambitions for growth. In the topsy-turvy world of PR agencies, we recommend you keep in the bank the equivalent of two to three months of your agency’s monthly labor and overhead (the monthly breakeven point). A firm may be profitable and also insolvent, if the profit is all in accounts receivables.
> The difference between its assets and liabilities is your agency’s net worth. Whether it’s called “net worth, “net assets” or “book value,” this number is (or should be) crucial. It’s the “owner’s equity” or “shareholder’s equity” and represents a central element in your efforts to manage your business by the numbers and build value to the firm.
> What net worth means for your firm. Your net worth helps you gain insight into whether your business is building value. If your agency owes more than it owns, it may have a negative net worth. You may still be in business with liabilities larger than assets, but your agency is probably living on borrowed money (and borrowed time). A negative net worth implies that after you liquidate the business, you will still owe people money. That’s not financially healthy. You will need to come up with multiple remedies, whether that’s cutting back on headcount, reducing expenses and/or downsizing on rent, for example. To be sure, a company’s net worth is a critical component of the valuation of the firm in the eyes of prospective buyers.
What do you think of our tips for reading and better understanding your balance sheet?
Rick Gould, CPA, J.D., managing partner of Gould+Partners, is the author of “The Ultimate PR Agency Financial Management Handbook: How to Manage By The Numbers for Breakthrough Profitability of 20% or Greater,” and “Doing It The Right Way: 13 Crucial Steps For A Successful PR Agency Merger Or Acquisition.”
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