Is your business as healthy as it could be?
Posted 20 May 13
Is your business suffering from declining revenues or profits, loss of customers or irregular cashflow? If it is, there could be a couple of issues.
It may be that your financial statements alone won't disclose the key indicators in an obvious way. Or it could be difficult for you as a business owner as well as a key employee, to step back and focus on the business as a whole. What you may need is a Business Health Check.
With the Global Financial Crisis impacting business to consumer and business to business spending patterns, a "health check" is as important for your business as it is for you to have regular check-ups to prevent small problems from becoming big issues.
Even if you feel your business is healthy, you could be surprised by how a health check can further strengthen your business value and bottom line.
A health check can assess current performance, identify commercial strengths and weaknesses and flag areas of risk, providing a solid starting point to establish strategies to enhance your business performance.
Importantly, a business health check will also provide specific strategies and assistance for where you fit in the Business Life Cycle and help you to identify how well your business is performing in certain areas, honing your focus on improving efficiency, results and overall business profitability.
When undertaking a health check it is important to take a holistic approach that does not just focus on the financial but takes into account the key pillars of your business, including:
- Business environment - review of your operational environment
- Business purpose - your goals / objectives
- Delivery strategies - realising your business plan
- Processes - implementation of objectives
- Resources - your available resources
- Performance indicators - past and future performance
The financial state of your business is important; however it can often be a lag indicator of a problem. By looking at the qualitative indicators you will often be provided with a gauge that will give you a chance to 'prevent rather than cure'.
Where a doctor might ask about your energy levels and check your temperature, blood pressure and cholesterol, you should consider the symptoms your business may be displaying around:
- Relationships with customers and suppliers - are there delayed meetings?
- Job satisfaction of your employees - is there increased turnover and sick-leave, or only polite attendance at social functions?
- Is the business actually matched to your perception of it and where it is headed?
- Are there cashflow issues?
- What external forces impact the business?
- Are the assets and financial future secure?
'Check the temperature' with some basic ratio analysis:
1. Current ratio = Current assets/Current liabilities
The ability to pay bills out of current resources over the next 12 months. A ratio of >1 : 1 generally indicates healthy operations; however an abnormally high result may give a 'false' impression and be a symptom of potential problems - such as aging debtors.
2. Total debt ratio = Total debt/Total assets
An easy way to evaluate long-term solvency of your business - ideally this would be at a ratio of <1:1, to indicate more than $1 of assets for every $1 of debt being carried.
3. Profit margin = Net income/Sales
Plain, simple and widely used; for every dollar in sales, what is the end result? Especially powerful when applied and analysed over time.
With any endeavour, but especially true when running a business - if you aim at nothing, you will hit the target with amazing accuracy.
Our experienced Business Advisory specialists can prepare a detailed Health Check for your business and assist you to develop a strong strategic plan. If you would like more information on our health check process or to talk about any of the issues raised above, please get in touch.