Is your business financially weak? Is its financial position weakening each year? It may be surprising to learn that many business owners cannot answer these questions. If you would like to determine the financial health of your company, here are a few financial weakness indicators you will want to be on the look-out for:
1. Cash flow picture for business is unclear
Business owners need to understand how much cash flow their business is generating on a monthly basis. They also need to understand how much cash flow is being generated by day to day operating activities, investing activities and financing activities. This will help them determine, at the end of the day, if they are actually increasing or decreasing their cash in the bank. Furthermore, if their business is not increasing its cash in the bank, what areas need to be fixed.
2. Financial statements are not meaningful or inaccurate
It is very difficult to manage a business with inaccurate financial statements. It’s like driving your car in the dark without headlights. If your bank, investors or business partners are having trouble reading your financial statements, they may not be accurate. If your accounting staff has no formal education or training in preparing financial statements in compliance with Generally Accepted Accounting Principles (GAAP), there’s a good chance that your financial statements are not accurate. You may want to consider having a certified public accountant take a look at your financial statements so they can perform an audit or a review, and let you know what is not being done correctly.
3. Losing market share to your competition or unaware of position in marketplace
If your business is not growing as fast as your competitors, you may be losing market share. If you have no idea how your business is performing when compared to your industry, there is good chance your business is losing market share to your competition. It is important to take some time each year to benchmark your business performance against your competition. This will help you learn which business strategies are working and which ones are not. It will also help you ensure that you do not get surprised by changes in your competition and market.
4. Inefficient use of assets (people, capital equipment, intellectual property, inventory) or loss of assets
One way of measuring business performance is by measuring your business return on investment (“ROI”). This financial metric measures your business net income relative to the amount of investment you have in your business. There are two ways to improve this metric, increase the company net income by a greater amount than your investment, or reduce your investment by a greater amount than your reduction in net income. The key is to be regularly reviewing your business net income and investment. Is your company income increasing each year? Is your company efficiently utilizing all its assets? Is your business equipment being utilized greater than 90% of the time? If not, you may need to change your strategy to improve your business ROI.
5. Not getting paid on time
Is your business allowing customers to pay in the future for goods and services delivered today? If so, you will want to ensure you are regularly reviewing accounts receivable and making sure your customers are paying according to your business terms and conditions. If customers are not paying on time, this can very quickly have a negative impact on your business working capital. This can make it difficult to cover the necessary business expenses such as payroll, rent, insurance and utilities. Financially strong businesses measure and manage their accounts receivable turnover on a monthly sometime weekly basis.
6. No long term strategic plan for business
Small Business Administration (‘SBA”) studies show that 80% or more of businesses that have been in business for greater than 3 years have long term strategic plans. These strategic plans enable business owners to plan for growth, set goals, understand the market and competition and make the right investment in people and capital at the right time. These strategic plans can lead to faster growth, lower risk, increased profitability and a greater ROI for your business. If you do not have a plan for your business, you may be at a disadvantage.
7. No indicators in place to adequately monitor business performance
It is very difficult to improve something without measuring it first. Your business is no different. If you do not have indicators in place to track the key drivers of your business such as: sales, profitability, quality, customer service, R&D, cashflow, employees, you may find it hard to determine what is causing a downturn in your business or where the opportunities for future growth exist. The key is to identify those key drivers of your business, set goals for these drivers and monitor your performance relative to these goals, on a periodic basis.
8. Not achieving required return on business investments
Just like any other investment you might make, it is important that you get the required return on your business investments, one that is commensurate with the risk you as a business owner are taking.
For example, if you purchase a piece of equipment for $100,000, and your required annual rate of return is 20%, it is critical that the equipment is generating profit after paying all expenses of $20,000 or more each year. If you are not getting the required return on your business investments, you may be better off putting those investment dollars to use in a different area.
9. Not getting the lowest cost of capital or don’t have the capital needed to expand
If you are finding it difficult to find capital to grow your business or the capital you are able to obtain is very costly when compared to your industry averages, it may be because your business performance is trailing your industry. That is, your company’s profitability, liquidity and solvency ratios are weak. As a result, your business has increased risk associated with it. Increased risk translates into higher borrowing costs. Strengthen your business financial ratios to help reduce your cost of capital.
10. No strategic banking partner
Business owners need to ensure they have a solid team of business advisors to address their changing business needs as they grow. A business banker is a key member of that advisory team. Your business banker can help you plan for and manage the debt financing you will need for such things as working capital, equipment and building purchases, as well as banking and merchant solutions. If your business does not have a strategic banking partner, you may be at a disadvantage when compared to your competition.
11. Paying too much in taxes
If your business is paying more in taxes than your industry average. You may be missing out on a variety of federal and state business deductions and credit that apply to your business and industry. With tax laws changing on an annual basis it is even more important to have a tax advisor that understands your business, is helping you plan for your business growth and putting in place the appropriate tax plan to keep taxes at a minimum.
If your business is experiencing any of the financial weaknesses listed above, it is in your best interest to get the financial support you need to address these weaknesses as soon as possible! Your business can be financially strong and increasing its financial position each year! If your financial advisory team is not effectively managing these items, please let us know. We will get your business the results that it deserves. Call us today (480) 980-3977.
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.