What constitutes a healthy business?
All businesses have weaknesses, strengths as well as aspirations and challenges. To achieve sustainable growth, it’s vital to diagnose and treat any issues before they threaten your chances of long-term business health and wellness. Periodic business health checks are an easy way to spot problems before they happen and help steer the direction of your business, moving forward.
When you set out to assess the health of your business, you need to look through a wide lens and capture the entire picture. A periodic business health check should be a staple of your ongoing business planning cycle.
Have you recently determined Your Small Business Health Score? Shall we?
Here are 10 components that can be reviewed to quickly determine your small business health score and find out where the business stands:
1) Cash Flow
Having a cash-flow-positive company is critical for success. The business should have more actual cash (not outstanding invoices or unpaid debt) from operating expenses on hand at the end of the month than the beginning. For a quick check, calculate the difference between total sales due and total unpaid purchases. Are you consistently generating positive cash flow from operating activities?
2) Quick Ratio
This simple balance-sheet formula divides current assets by current liabilities. Ratios greater than one mean the company has enough current assets to pay its current bills. Note that a healthy quick-ratio number will vary by industry. However, an all industry average for this metric is roughly 2. How does your quick ratio compare with your industry average?
3) Customer Relationships: Recurring Revenues & Referrals
Its Ideal situation for a small business when a large percentage of repeat customers pay the company automatically every month and the company does not need to rely on finding new customers to recreate its revenue. Also, its ideal when business referral opportunities occur consistently. Do you have a value proposition and a customer-centric relationship management process in place to acquire and retain customers organically?
4) Fixed Overhead Expenses
High fixed overhead expenses do not give companies flexibility when sales and profits change. The fixed expenses (operating expenses such as rent, utilities, employee salaries etc) for a profitable business ought to be lower than their total sales. How well are you monitoring and reducing fixed expenses for your business on an ongoing basis?
5) Management Team
Strong companies are not just about their owners, but also their executives and team leaders, for a truly collaborative organization. The CEO should not be the one making all the decisions, or putting out all the fires, for the business. Is your business built to run without the CEO for a few days/weeks at a time?
6) Employee Turnover & Engagement
Loyal employees are a key determinant of a business’s success. Businesses with low employee turnover tend to generate higher profit than those with high turnover. Both the company and the employees benefit when employees stay for at least 5 years and both lose if employees stay 2 years or less. What is the employee turnover for your business? And, how motivated and engaged are your employees?
7) Strategic, Focused Plan and Execution
Companies that have a written strategic plan for where they are headed and ensure their employees are clear about the company’s direction tend to be greater than 10% more profitable. What strategic plans and priorities does your business have in place? Is it being acted upon and reviewed consistently? And, has it been communicated effectively to all the employees?
8) Systematic Marketing and Sales Strategies
Many small businesses only market when they have no sales and then stop promptly once they do. It’s mandatory for any successful business to have an ongoing systematic marketing plan to raise awareness and customer base, including social media, and that marketing and sales are not mostly ad hoc activities. The US Small Business Administration recommends that an average small business should invest 7- 8% of gross revenue in marketing. Sales, the life blood of any business, also needs effective strategies for small businesses such as relationship selling based on referrals from existing customers and social media selling. Do you have effective marketing and sales strategies and action plan for your business?
9) Business Systems and Processes
Growing companies need to have an infrastructure that supports them, which should be updated on an ongoing basis as the business situation and needs change. Key areas of businesses such as financial, accounting, human resources, project, team and customer management need appropriate and effective systems and processes. You are in a good position if the company has integrated systems that can be effectively used by employees and customers, and in trouble if each system is disjointed and independent from each other resulting in inefficient operations. What systems / processes must you excel at, in order to satisfy customers and benefit from operational efficiencies? Do you have these in place?
10) Outside Advisors
Small business owners need to ask for help from experts and outside advisors to support all the key areas of business including finance, accounting, human resources, science/technology/innovation, strategic planning and execution. You are on the right path if the CEO has outside advisors and experts guiding and supporting various aspects of businesses; however, beware if the owner is insulated and does not work with advisors.
Scoring:
How to score: Add 2 points (for each of the 10 components) if the business meets or exceeds the required criteria standard, otherwise subtract 2 points if there seems to be a gap between where things are and where they need to be for each metric. You can add/subtract one point if you partially meet the required criteria standard and would like a partial credit for it.
Above 12: Congratulations! Your small business is healthy and well positioned for growth. Look at improving any area where the score was negative to increase your strength.
0 to 10: At risk! Key parts of your small business need attention. You are vulnerable to changes inside and outside the company. Address inefficiencies in the elements where your score could use improvement.
Below 0: Beware! Many parts of your business need immediate attention and your company may be at risk. Seek help right away!
So what is your small business health score?
Contact us at info@josh-i-associates.com if you would like to explore how we can help your business win big.
Josh.i & Associates: Empowers CEOs of small- to mid-size biotech/medtech/diagnostics businesses with unique and innovative strategies to accelerate all aspects of your business growth with customized roadmaps for Success.