So you run a business but you aren't actually sure how well you're doing. Welcome to the club, many are in your shoes. Today's entrepreneurs face a barrage of challenges and pressures that constantly require their attention. It's easy to get caught up in the day to day without actually reflecting on how you are doing. As always, if you have a question or think you might want to work together, please get in touch through my Home Page. Also, never miss a blog by following me on LinkedIn or Facebook.
For all you busy business owners out there, here are 5 key ways to tell if you have a healthy business:
1) Cash Flow
Cash is king. It's the first thing I learned in finance class. Is your company's cash flow positive? If so, that's a sign of a healthy business; however, keep in mind, there are many degrees of "healthy". Even though you have positive cash flows there's likely quite a few things you could be doing to improve it. On the other hand, if your cash flow is negative, you need to work on that problem right away since your ship is sinking. The key is to always manage negative cash flows and try as hard as possible to make sure you aren't surprised by it. Some things are out of your control, IE, the Covid 19 pandemic, however, you need to be planning around things like traditional slow times for your business, growth / expansion phases and significant new capital asset purchases.
Example things to look at to improve your cash flow are as follows:
a) Check Your Accounts Receivable
You should be getting paid at least within 45 days after the invoice was issued. 30 day payment terms are very common. If you aren't, you've got to tighten your policy and speak with your customers. Make sure your terms are noted on your invoices and see about offering more ways to pay. Clear payment terms and lots of electronic ways to pay can improve collection dramatically.
b) Trim Some Fat Off Your Expenses
There are lots of effective ways to try and cut costs. Try my other blog here for ideas and suggestions:
c) Manage Your Inventory Better
One of my favourite case studies from over 15 years ago in university was about Walmart. Walmart became and continues to be very successful in part due to their rigorous inventory management systems. They implement a "just in time" system that optimizes inventory levels so they are rarely stuck with unsold goods or too much cash tied up in stock. While your business likely isn't going to stack up against Walmart, you probably could do better with your inventory management. The key is to have the right things at the right time, and never to have too much stock on hand. It is worth taking a regular look here.
2) Staff Turnover
Some staff turn over is normal, however, too much can be indicative of problems in your business. It could be lack of growth opportunities, better competitor offerings, a weak corporate culture, poor regular feedback or training, your inability to listen to suggestions, or a whole host of other reasons. If you think your turnover is high, you better figure out why because it's a sign of an unhealthy business.
3) Cash in the Bank
You've heard the term living paycheck to paycheck? Yea, it's no different for you and your business. Your business should have at least 3 months of cash / financing reserves available to help you weather unexpected business challenges. To make your cash reserve work for you, see about a commercial banking account that offers at least some sort of interest rate or better yet, have a business line of credit open and standing by in case disaster strikes. If your business has no cash reserves or access to financing, that's a sure sign of an unhealthy business.
4) Getting Timely Financial Reports
An unhealthy business relies on old, dated information to make future orientated decisions. If your bookkeeping is way behind or you only get reports 30+ days after the data is generated, you need to seriously think about improving your financial reporting. A companies month end should close in as few as 3 to 5 days, depending on the complexity of your business. You should have your monthly reports at that time to review.
Your reporting also needs to go past the measurement stage (just looking at the past), and instead needs to help you understand and most importantly improve your future financial situation. Keep in mind, this isn't your bookkeepers job, you probably should get a qualified resource to help you with this endeavour. A qualified resource can help you improve your finances through insightful recommendations, trend analysis and action plans.
5) Sales Growth, Keeping your Most Valuable Customers and Low Revenue Churn
A healthy business is a growing business. The healthiest businesses always have a growth goal in mind. If your revenues have stagnated or are actually going down, that's a sign of an unhealthy business. Revenue decline will make your business harder to sell in the future as well if that's your end game. Always be thinking about ways to grow.
In addition, if you've just lost some large accounts or ones that have been with you for a long time, that's very indicative of an unhealthy business. Something has broken down for those customers to seek an alternative to you. Hopefully you have a good relationship with them and you can at least get their brutal, honest feedback. Swallow your pride when they tell you and take immediate action in your business.
Finally, businesses with low revenue churn are often offering a quality, value driven product at a good price. Churn is the number of customers that have cancelled their services with you as a percentage of your total monthly or annual recurring revenues. Revenue churn isn't applicable if you sell something that is a one off, however, it's an extremely valuable measure if you rely on recurring monthly or annual revenues from services you provide. A churn rate of over 5% per month is a sign of an unhealthy business and you need to investigate why customers are leaving. It is way easier and cheaper to keep customers than to find new ones.