Assessing the Health of Small Businesses

Assessing the Health of Small Businesses

Just like we do for our physical wellness, we should be giving our companies routine health checkups on a regular basis. It’s too easy to say “everything feels fine” when our accounts are in the black and bills are paid on time each month. Those are important indicators, of course, but smart owners should be assessing the health of small businesses to identify emerging issues as early as possible.

Let’s take a look at five key things owners should be regularly assessing –

 

1. Tracking the Annual Uphill March of Operating Expenses

Every year, things get a little more expensive. Prices always seem to creep steadily higher, bit by bit, in ways that can sometimes be easy to miss. Gasoline, as a more overt example, was roughly half its current price in the mid 1990’s. A subtler example would be something like the average price of paper, which actually saw increases several times last year.

As such, business owners should be meticulously tracking their operating costs down to the smallest items. Doing so will enable adjustments to be made upon review, and it’ll prevent small increases from sneaking by unnoticed.

 

2. A Balance Plateau Means Death

There are two items on your monthly, quarterly, or yearly balance sheets that need to reflect steady growth in order for your company to remain sustainable: your revenue intake and your cash reserves. Don’t worry if your growth numbers are small, the only thing that matters is they don’t plateau and fall stagnant. Even the U.S. economy’s overall growth rate hovers around 2 percent these days.

If your revenue isn’t growing, even slightly, month to month, you’re going to have problems down the road (see item number one on this list). Also, if the amount of cash you have on hand isn’t growing, or if you’re reinvesting too much of it back into your business, you may not be able to satisfy unexpected debts that could arise. Don’t be satisfied with simply being in the black; your numbers need to be growing as well.

 


“Incompetence” accounts for 46% of startup business failures.

Researchers defined the specific pitfalls of startup incompetence as:

  • No experience in record-keeping
  • Emotional pricing
  • Living too high for the business
  • Nonpayment of taxes
  • No knowledge of pricing
  • Lack of planning
  • No knowledge of financing

Source: Statistic Brain


 

3. How Full is Your “New Business” File?

Is your company conducting most of its business with long-term clients that you’ve served for years? Or are you experiencing a lot of client “turnover” with lots of short-lived customer relationships? The truth is that both of those scenarios are dangerous for companies. The best situation to be in is a healthy balance between the two.

Onboarding new customers is generally more expensive than maintaining your long-term ones, forcing many business owners to forgo even the attempt to attract new business at times. But relying on those long-term relationships to remain in place indefinitely is a losing strategy. New business must be drawn into your client roster to help insulate your company from the whims of evolving markets, changes in leadership among your clients, new competition, and much more. A healthy company has a diverse mix of short- and long-lasting customer relationships.

 

4. Do You Know Your Profit Margin?

It might seem like an amateurish question to ask a business owner: Do you know what your profit margin is? Some will have a ready response – “It’s about 15%” – but if you really think about it, that’s not a very precise answer for such an important ratio.

Allow us to rephrase. Do you know exactly what your profit margin is? After you consider all of the manhours, the overhead, your costs-per-sale, it’s quite possible that your real profit margin is quite a bit smaller than the figure you’d hoped for.

In the broadest terms, the go-to formula to calculate your profit margin is: Sales – (materials + labor + overhead) / Sales, as published by the QuickBooks Resource Center. Be sure to incorporate all of the details of your expenses that you’ve been tracking, and factor in all of the time and effort needed to complete your sales. Consistently benchmarking your profit margin is a great way to monitor your company’s health over time.

 

5. Balance Your Humors

In ancient medicine, folks used to believe that the body’s “four humors” needed to be in balance to ensure health. In business, it’s the four ratios. They are:

  • Common size ratios – a handy way to evaluate how your company uses cash
  • Liquidity ratios – used to measure your company’s ability to cover expenses
  • Operating ratios – used to measure operating efficiency
  • Solvency ratios – used to measure stability and a company’s ability to cover debt

These might sound intimidating here, but these ratios are easily calculable and can provide business owners with perspective about their company’s standing. A simple Google search for “the four financial ratios” will provide you with several step-by-step guides to walk you though the process, all beginning with a look over your company’s balance sheets. With a little effort and a little bit of homework, you’ll be evaluating numerous aspects of your operation in no time. It’s worth the effort because, as they say, knowledge is power.

82% of small companies fail because of cash flow problems. (Business Insider)

Checkups Are Good Ideas

Just like with our bodies, getting a routine checkup can help identify and eliminate emerging problems before they become overwhelming. In taking the time to perform just a few basic calculations as they apply to your company, you could very well pinpoint areas of concern that need to be addressed to stem the financial hemorrhaging. Stay smart, stay safe, and give your business a checkup.