A Do-It-Yourself Business Health Checkup Manual
A business health checkup is as essential as a physical and less painful than a root canal. Even if numbers are not your game, you can use these simple guidelines to check the pulse of your company.
Monthly Business Health Self-Exam
Your path to owning a financially healthy company begins with a monthly examination of the three parts of your full financial statement.
1. Balance Sheet
A balance sheet is a summary of your assets, liabilities and equity for a given period of time.
Assets are the resources your company owns or controls that have economic value.
Liabilities are the money that your company owes to third parties, like your financial institution.
Liabilities are then broken down into two categories.
- Current liabilities, such as rent, wages and utilities, are due within a year.
- Long-term liabilities, such as long-term debt and deferred tax liability, are due in more than one year's time.
2. Profit and Loss Statement
A profit and loss statement details how much your company receives in sales, and how much it spends to generate those sales.
Operating income = revenues – expenses
Gross Profit = total revenues – cost of products sold
Net Income = revenue – (expenses + taxes, interest payments, depreciation and other expenses)
3. Cash Flow Statement
A cash flow statement details how your business spends money (cash outflows) and where those funds come from (cash inflows).
It looks at these three major business activities:
Know your Current Ratio
A current ratio forecasts whether or not your business has the ability to pay its bills.
Current ratio = current assets / current liabilities
Your ratio should fall between 1.5 and 3. If you have a current ratio of less than 1, it means that you might not have enough cash on hand to pay your bills.
Weekly Financial Self-Exam
If you really want to maintain excellent business health, you'll have to work at it regularly. On a weekly basis, you must look at these financial indicators:
1. Gross Profit Margin
Gross profit margin helps you determine if you are setting the right price for your services. Your gross profit should always exceed your operating expenses.
Gross profit margin = (revenue – cost of services) / revenue
2. Net Profit Margin
Net profit margin shows how much of each revenue dollar translates into profit.
Net profit margin = net profit / revenue.
3. Labor as a Percent of Sales
Labor as a percentage of sales gives you an indication of the efficiency of your workforce.
Percentage of labor cost = cost of labor / total cost of doing business
4. Average Service Call Ticket
The average service call ticket simply tells you how much money you earn off a typical sale.
If you set aside time each day to examine the health of your business, you can spot issues before they snowball.
Daily Business Self-Exam
Closely watch these three early indicators:
Incoming service calls
- What's in the sales pipeline
- Work in progress
- While all these exercises may seem time-consuming, they could one day save the life of your business.