# Step 4: Prepare Financial Analysis (Weeks 7-8)

## Quest for Where to Focus

At this point, you know where you’re going. You have your projections done, your accounting is in good shape, and you have an action plan started. However, you haven’t really achieved your targeted goal, which is to improve profitability and cash flow. This is where you start analyzing your historical numbers to figure out where to focus, where the beef is, where you can make a difference. The best way to do that is to start analyzing the numbers to figure out where things changed.

### Flux Analysis

Let’s talk about numbers. The first thing we like to do is a Flux Analysis. A Flux Analysis is an analysis of the past 4 or 5 years laid out on a spreadsheet, in both absolute dollars and percentages which is a common-sized financial statement. One looks at the total dollar amount, but the other looks at the percentages and takes out the change in volumes.

The Flux Analysis is a powerful tool to focus your efforts on opportunities to drive profits and cash flow. By looking for negative or degenerative trends, you can highlight accounts or relationships to investigate.

### R-Series Report

This is your Ratio Analysis or your EKG. This has a similar time frame – 4 or 5 years – although we personally like to use a 4-year period. The R-Series crunches about 55 standard ratios you would use to normally analyze a company; you plug the numbers from the past 4-5 years in your financial statement, and voilà, out pops the ratios which you can then use to find out where you might have strayed from your goal.

### Dynamic Cash Flow Projections

The Dynamic Cash Flow Projection is where the projection part comes into play. You would look to see, if you change certain assumptions, how big of an impact the change has on net income. The goal is to improve profitability by 1-2% of sales. If you have a line item that’s \$50,000, and you have a \$50 million company, who cares? But if you can change the gross margin by 0.5% and increase your sales volume, you may end up with 1%. This is where you start looking to see what you can do.

The purpose of this is not to crunch numbers. The purpose is to find clarity of where you should drive value in an organization.

### Resources:

Flux Analysis

R-Series Report

Dynamic Cash Flow Projections

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