How Healthy is Your Business?

Financial healthWhen was your last physical or financial health check? Are you the type of person that schedules an appointment with your doctor every year to find out if there are health issues that need to be addressed like rising cholesterol levels or blood pressure? Or are you more likely to put off your health check for a few years assuming everything is okay unless some new aches and pains arise? Do you want to know if something is wrong, or do you prefer not to know if it means you must make some drastic changes? We all know we should get regular checkups, but all too often, we put them off or reschedule until years have passed.

As a business owner, do you approach a deep dive into your financials with the same trepidation as your physical? Do you prefer to cruise along assuming everything is okay as long as your checking account balance is positive, and bills are getting paid? Or are you not sure what you should be reviewing regularly and are afraid to ask for fear of looking foolish?

We get it. Most business owners did not start a company to be a financial health whiz. We all tend to avoid things we don’t understand well or tasks that intimidate us. Much like avoiding the doctor when you are afraid there may be unpleasant news, many business owners dread examining their financials, especially if they haven’t done it in a while. But the longer you put it off, the harder it will be to make corrections if necessary. As Peter Drucker famously said, “You can’t manage what you don’t measure.”

So, what should you be reviewing on a routine basis? In today’s complex world, every entrepreneur must pay attention to at least the following reports on a regular basis to keep your pulse on your company’s financial health.

Income Statement (Total Revenue/Gains – Total Expenses/Losses = Net Income)

Sometimes referred to as a profit and loss statement, your income statement reports how well your company is performing financially over a specific period of time. It shows how much revenue your company made, how much it cost you to bring in that revenue, gives insight into how efficiently your company is running, and identifies areas that may not be performing as well as they should.

Balance Sheet (Liabilities + Owner’s Equity = Assets)

A balance sheet is a snapshot of your overall financial condition at a specific moment in time. It looks at your equity or what you own (cash, land, equipment, etc.) minus your liabilities or what you owe (accounts payable, taxes, debt, etc.) to give you an overview of your entire financial picture.

Aging Accounts Receivable and Payable

Accounts Receivable (AR) is a list of the money that you are owed but haven’t received yet. An aging AR is one of the leading causes of cash flow issues. By looking at this report you can identify your slow payers and do what you can to ensure they pay more promptly. Accounts Payable (AP) is a list of money you owe to your suppliers or creditors that has not yet been paid. Reviewing this report regularly will allow you to see if your expenses are increasing (or decreasing). Some business owners choose to pay invoices as close to their due date as possible to improve cash flow.

While this will give you a decent picture, businesses that want to thrive should routinely be looking at much more. The following additional reports, if applicable to your business, are essential tools to detect problems before they have a chance to negatively impact, or even destroy, your company:

  • Inventory turns: This shows how quickly you convert a dollar spent on raw materials or other inputs into cash with which you can pay salaries, overhead, etc.
  • Gross profit: This helps you identify which inventory items make money, and which do not. If you find that you only have a few items that contribute to profits, while the rest pile up in your warehouse, it may be time to re-evaluate what you sell.
  • Customer profitability: Like inventory items, some customers are highly profitable while others drain your resources. Regularly analyzing your profit by customer will help you identify your best customers – so you can target more like them – and your worst ones – so you can avoid more like them. This information should be communicated to your customer service team too.
  • Customer turnover: How much money to you spend on getting new customers because your existing ones do not buy again? The information from this report can help you improve customer service so you can turn current customers into repeat ones.
  • Customer acquisition cost: How long does it take to earn a return on the money you spend acquiring a new customer? If you have high customer turnover, and high acquisition costs, often customers don’t stay long enough to become profitable.
  • Benchmarking: How does your company’s performance compare to others in the same line of business? Or should you be aiming higher by comparing to an aspirational list? Insights like these and many more are a benefit of joining a business association focused on your industry. It can also be a way to find out about competitors that may be vulnerable and create relationships with potential partners and referral sources.

As you may expect, there are many other financial reports you can review as well, but this is a solid start for most business owners. But here’s the thing: like your annual physical where you go to the doctor to have him check you over, it is a good idea to give your company’s financials an annual check-up too. That is why we created our Financial Health Check service. We can conduct an annual review of your business financials to gauge how you are performing and offer insight into adjustments you can make to plan for the future.

How does it work? We start by learning as much as we can about your business and your future goals. We follow up that conversation by performing a financial health diagnostic of your business now, identifying areas for improvement. With that knowledge, we will create a customized action plan for you to follow so you can react to operational issues more rapidly and make changes that will improve your cash flow and profitability. Next, we will work with your team to help implement the changes we recommend, filling in the skills gap where needed to ensure it is executed properly. Once in place, we will monitor your progress and be available to help you respond to unexpected market conditions or business interruptions.

By understanding your financial health position today and into the future, you will be able to make more informed and smarter decisions. Reach out to us if you would like to know more about our proprietary financial health check process and discover how greater knowledge of your company’s financials can lead to a long and healthy life for your business.

Contact your RSW Advisor today so that we can help you understand your financial health better.