Is your company growing or simply treading water? Expert Ty Kiisel shares 8 questions all small business owners should ask themselves.
When starting my first small business many years ago, a CPA friend tried to teach me the importance of occasionally asking myself a simple question: Is my business healthy? Unfortunately, when I looked at my business checking account and saw money there, I assumed the answer was “yes.”
Because I thought I had things under control, my friend’s advice didn’t register, and I really had no clue about whether or not my business was healthy.
Most small business lenders want to finance strong and healthy businesses. They might not ask the questions in the same way, but the business owner who can successfully convince a lender that his or her business is healthy and successful will improve their odds of a successful business loan application.
Over the years, I’ve come to understand some straightforward metrics for examining a business to help determine whether or not it’s a healthy business. Some are financial measures, while others are not. Here are eight questions that will help you determine if your business is healthy—or in need of a respirator.
1. Do you have more cash at the end of this month than you did last month? After you pay your expenses, is the amount of cash left over increasing every month? There are companies that operate at a loss as they invest to increase their ability to scale (a common strategy for venture-backed tech companies), but whether or not your cash position is getting better every month is a pretty straightforward way to measure if you’re gaining profitability or simply treading water. Healthy businesses see increased profits every month.
2. How old are your accounts receivable? Every business is different, but it’s safe to say the longer you carry an overdue balance, the less profitable that balance becomes. In my first business, I found that, after 90 days, I’d virtually lost all my profit in that sale. I offered my customers 30-day terms and because I operated on narrow margins. I started losing profits if anything went beyond 45 days, and it was costing me to do business after 90. Like many small business owners, I hated calling customers who were past due. While the length of time a business can carry an overdue balance before losing profits varies, healthy businesses have customers who pay on time.
3. Do you have a rainy-day fund? My father always counseled me to live on less than I earned and put away money for a rainy day. Similarly, healthy businesses have cash on hand to cover emergency expenses or to take advantage of surprise opportunities. How much you need to set aside depends on the nature of your business, your tolerance for living by the seat of your pants, and probably whether or not your business is generating more profits every month. But setting aside cash to address unforeseen expenses is just a good idea—and the mark of a healthy business.
4. Are your overhead expenses going up at the same rate as your revenues? As your business grows, your overhead expenses will probably increase. If overhead expenses are growing at the same rate as your revenue, something’s likely wrong. This harkens back to our first question. Looking at how your overhead expenses are growing compared to your revenues over the course of several months might even give you an early warning that you’re not making headway with metric number one.
5. How often do you turn your inventory? The longer merchandise sits on the shelf or in the showroom, the less profitable it becomes. Even if you pay cash for your inventory, you have money tied up that could be used someplace else to increase profits. If you’ve ever visited an auto dealer at the end of the month, it’s hard not to notice how hard they push to close the deal. Because dealers often finance the cars they sell, they are very aware of how long they can keep them before they start losing money. Clothing stores, furniture stores, and hardware stores all feel the same pressure to keep their inventory turning, although they may cycle on different timeframes. What’s more, it’s not uncommon for small business owners to maintain more inventory than they really need. When was the last time you looked at how often your inventory turns?
6. Is your company a revolving door for employees? This isn’t a financial metric, but if your company is leaking employees, particularly your best employees, it should throw up a red flag or two. Most employees quit their boss, not their job—and if they’re ignored when they bring up concerns, if their contributions aren’t recognized, or there’s a bad culture, it’s not uncommon to see an exodus. Every company experiences employee turnover, but healthy companies can keep happy and motivated employees.
7. What are your customers saying? Every company has a bad customer review or two. It’s hard to keep everyone happy all the time. It becomes a problem when the majority of your customers are complaining, but it can be informative if your customers are all complaining about the same thing. Healthy companies are able to resolve issues and address customer concerns. While you can learn a lot from unhappy customers, healthy companies have more happy customers than unhappy customers.
8. What do your credit profiles look like? In addition to some of the above metrics, potential small business lenders will consider your personal credit score and your business credit profile when they evaluate the health of your business. A good credit profile is not only an indication of a healthy business, it also means you’ll likely have more loan options, better terms, and better interest rates when you need small business financing.
Gauging whether or not you have a healthy business requires looking at the numbers—and more. These eight suggestions give you a high-level look into whether your business is healthy and growing, treading water, or in trouble.
Ty Kiisel is a contributing author focusing on small business financing at OnDeck, a technology company solving small business’s biggest challenge: access to capital. With over 25 years of experience in the trenches of small business, Ty shares personal experiences and valuable tips to help small business owners become more financially responsible.
Business chart image courtesy of Shutterstock.