Knowing your business is in good financial health is crucial for weathering an economic downturn and planning successfully for the future. But how do you know whether your business is fighting fit or in need of a serious workout? Here are 3 key indicators that will help you determine the current shape your business is in.
Do you currently have a lot of debt on your books? There are often times when a business needs extra financing, to help with struggling sales when times are bad or to add extra staff or new machinery when business is good. However, it’s very important not to overextend yourself when borrowing and experts advise you should have a debt-to-asset ratio of no more than 20% to be considered healthy. If your borrowing is hovering anywhere close to a 50% ratio, your line of credit could be reduced in future or possibly even cancelled, with potentially disastrous consequences for your business.
Calculate your current debt, including all lines of credit, bank loans, card borrowing, business equipment leases and others. You should also order a credit report for your business and check that your score is still sufficient to obtain future credit, should you require it. You may also need to improve your personal credit score if you’ve used it as a form of guarantee for your business.
Having a healthy cashflow is one of the most important indicators of your overall business health. Even if sales are strong, a company can still get into serious problems if it runs out of money to pay suppliers, rent, salaries or other payments that can’t be delayed. If companies you trade with find themselves struggling, they may delay their payments to you, and this can dry up your cash supply if you don’t keep a watchful eye on who owes you money.
Monitor your cashflow carefully and record your cashflow projections as part of your business budget. Stay on top of collections by limiting credit to customers who regularly pay late, and make sure you have an emergency fund so that you can always cover necessary expenses in a typical business month.
A healthy business should always be looking to grow its customer base, so if your business has seen a decline in customers, this is another indication that your company may be in trouble. Reexamine your current marketing strategy to ensure you’re reaching as many potential customers as effectively as possible, and use social media like Facebook and Twitter to connect with existing customers and strengthen your brand loyalty.
If the bulk of your business sales come from a handful of big customers, you risk suffering serious losses if any one of them ceases to be a business partner. To avoid such an outcome, you should aim to diversify your customer base as much as possible.
Keeping a close eye on these key business financial indicators will keep your business in the running and ensure it doesn’t flag before the finish line.