Business is similar to a person, it can also be healthy or ill. And this approach applies to all companies from small flower stores to huge digital corporations, like WooCasino or Netflix. But how to determine a healthy business? These signs will help.
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Your Business Consistently Pays Dividends
The first sign that a business isn’t sick is stable dividends. You can talk about the health of the company if the owners receive monthly dividends and their amount is gradually increasing. For example, at the beginning, they received $1,000 and it was 5% of profit, and two years later they receive $10,000 and it’s still 5% of profit.
If there are no dividends or the owners receive them chaotically: this month they get $50,000, and next month they get zero, something is wrong.
This Month, There Is More Money Left Than Last Month
There is such a metric – the balance at the end of the month. This is how much cash in the safe and in settlement accounts the company has at the end of the month. Ideally, this balance should grow every month, or at least not decrease.
There is a nuance: the balance may grow due to loans. For example, a company usually has $10,000 left over, and then it took out a loan and the balance went up to $30,000. That sounds good, but it’s someone else’s money.
So here are the checkpoints that confirm the health of the business:
- The balance at the end of the month is growing or not decreasing.
- The balance is made up of company money, not loans.
When one of the checkpoints is not passed, you need to look deeper:
- Look at the business model to see if the business is even capable of making a profit.
- Look into the reasons for the loans: did the company take them to cover a hole from chaotic dividends or just unreasonable expenses, such as a fancy corporate party?
- Check large purchases: maybe the account balance is lower than usual because the company bought something expensive, like an excavator, which will help it make more money.
After this analysis, it will become clear what to do next.
No Cash Gaps: The Company Has Enough Money for Current Operations
It often happens in unhealthy companies: you need to pay someone, such as a landlord for an office, and there is no money – this is called a cash gap.
Businesses that don’t face cash gaps or face them very rarely can be considered healthy in terms of cash flow. But a business that regularly faces cash gaps is definitely sick. And it needs to look for the cause of the disease, such as:
- Customers are constantly behind on payments. The company needs to pay suppliers, and it hasn’t yet received money from customers – that’s the cash gap.
- the company buys equipment or goods and spends more money than it can afford.
- Suppliers ask for full prepayment or large advances – the company pays, and all the money goes to it.
The reasons are different, but the result is the same: there is not enough money and the business gets into debt, for example, taking out loans, asking the suppliers to wait with the payment.
The Resources of the Business Are Used at 100%
Every company has resources – equipment, premises, employees, technology. If these resources are used at 100%, the company is healthy. If the resources are not fully utilized, but the owner buys additional equipment, takes additional premises, and hires employees, the situation is unhealthy.
Let’s look at an example. There is a dentistry, with three offices and three doctors. With these resources, it can take a maximum of 90 patients monthly. If the dentistry serves 90 patients, it means that the resources of the business are used at 100%. But if there are not even 40 people a month – you need to think about how to load doctors and offices to the full, and only after that think about expanding, hiring and so on.
Review the resources of the business and calculate what load in clients, goods or sales will allow you to use them 100%.
There is no single methodology for calculating utilization. Depending on the area of business, the load is calculated for equipment, employees or premises:
- If we have a dump truck that can work 8 hours a day, but it only works 5 hours – it is not loaded, the load of 100% for it will be 8 hours.
- If we have a 200-seat cinema, the full load will be the sale of tickets for all 200 seats.
- If we have a window production facility with one machine, which can produce a maximum of 300 windows per month, then 300 windows – this is 100% utilization of this business.
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Customers Aren’t Returning More Often
In a healthy business, it’s not just the owner, the accountant and their tax dollars that are happy, but also the customers. A quick way to see if they’re happy is to look at return trends.
If a certain item begins to be returned more often than other similar items or more often than last month, it means that customers are dissatisfied with something: quality, speed of delivery, politeness of the courier or something else. There is a symptom of the disease, we need to look into it further.
To monitor the level of customer satisfaction helps to analyze the percentage of returns. There is no norm for returns, so you need to look at the dynamics: if the percentage doesn’t change from month to month, everything is fine. And if it suddenly begins to grow, you need to look for the cause of customer dissatisfaction.