Instant Assessment for Small Business
I developed a quick “instant assessment” for business owners to get a quick overview on the fiscal health of their company. I urge owners to do this every month, if possible. As a business owner, you need to know your numbers inside and out. You should be able to defend your numbers to lenders, auditors, stakeholders, and yourself. Being able to translate financial statements into plain English will not only give you managerial insight right now, but will allow you to look at historical trends and make strategic decisions for the future of your business. The good news is that you don’t have to have a PhD in economics to do this. Grab your P&L and Balance Sheet - let’s get started now.
CAN YOU PAY YOUR BILLS?
Nerdy people call this the “Liquidity” ratio, or “Current Asset” ratio.
Simply divide your Current Assets by Current Liabilities.
“Current” means less than a year. Your Current Assets are assets that can be converted to cold, hard cash within a year, such as Accounts Receivable, Checking and Savings accounts, etc. Current Liabilities are due within a year, like short-term loans and credit card debt.
Aim for a higher ratio. If your answer is lower, compare it to previous months. Is there a trend? How can you improve this?
HOW RISKY IS YOUR COMPANY?
Creditors don't like to lend to companies that are too risky. Think about it this way, would you lend to yourself right now? This ratio can also tell you when it might be a good time to acquire another business. This is a banker’s favorite ratio!
"Risk level" also known as the "Debt to Equity Ratio" = Total liabilities / Equity
Total liabilities here can be mortgages, personal loans, credit cards, etc.
Your equity is your basic net worth from your Balance Sheet, or profit.
Traditionally a ratio of 1.00 to 1.5 was thought of as "ok". After the events of 2020, a more conservative range of 0.50 to 1.00 should be considered.
ARE YOU PROFITABLE?
Investors will look at many different numbers to determine profitability. There’s no one magic number to determine your profitability. With that said, “Cash is King”! Just because sales and revenue increase doesn't mean that you will stay in business. Many companies have gone bankrupt because they weren't able to manage their cash flow wisely. Grab your P&L, also known as your Income Statement. We'll just use one ratio to start.
Gross Profit Margin = (Revenue - Expenses) / Revenue
What is your number? As the owner of the business, only you can decide what your GPM “should” be.
WHO IS SERVING WHOM?
I stand on a lot of soap boxes, and this is one of them. You likely started your business for a variety of reasons, such as freedom, flexibility, ability to make an impact, and more. I see a lot of business owners who end up working with their head down and toiling day in and day out for their business without getting a reasonable ROI. Here are some questions you can ask yourself to see whether you are serving your business, or your business is serving you.
When do you pay yourself? Is it on a regular basis?
How much do you pay yourself? Is it in line with what the market would pay?
Do you take any bonuses?
Do you "reinvest" back into the business? If so, how much? Why?
HOW WOULD YOU RATE THE FINANCIAL HEALTH OF YOUR COMPANY?
Use a scale of 1 through 10.
1 means, "Yikes"!
10 means, "there's a bidding war to acquire my company"!
Justify the number you wrote down. What areas do you want to immediately improve based on the questions above? The other questions in this article do not mention intangibles, which can be very valuable for a company. You’ll also want to pay attention to Goodwill, Cash Flow, Employee Retention, Owner Lifestyle, Client Service and more.
Don’t get too hung up on the other numbers here, but rather use these as a guiding light to make informed decisions about your business. As CEO, CFO, COO, and all the other hats you may wear, your financial numbers will give you the framework to make strategic calls in your business.
If you need help interpreting your numbers and digging into the details, contact me for a no-obligation consultation. I’ll help you sort through the weeds and get on to a path toward success.
Email me at cgamache@audaxwealth.com to get started now and avoid more lost dollars.
