how to assess the financial health of your business
Throughout your business journey, it’s a good idea to take a step back regularly and assess its trajectory. Can your business continue to grow and increase profitability? Can the business help you, as the owner, achieve your goals? After all, the ultimate goal of a business is to generate a return on investment for its owners.
How to start your evaluation? First, look at your personal and organizational financial health through the same lens, as the two are often linked.
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Be honest with yourself about your priorities as an owner and how those priorities relate to decisions made in both your business and your personal life. Have a clear personal financial plan – and understand that you depend on the business to achieve those goals – to help clarify your assessment of personal and organizational financial health.
Then assess the value and profitability of your organization to understand how you are doing and what the future might hold for you. Link your personal financial plan to this value assessment to align your assessment of overall financial health.
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To assess the value of the organization, consider a concept known as the value triangle. This approach focuses on three factors that drive bottom line results: execution, growth and leadership. Ask yourself specific questions as you consider each of them.
Execution – How does your business make money? Is it efficient and able to maximize its profitability? What processes and systems can be improved? What cost structure do you need now and in the future to achieve your goals? Are you making the most of the opportunities? How do you manage the risk?
Growth – Is there a demand for your product or service? Can you develop and maintain customer relationships to capitalize on this demand? Can you sustainably develop and diversify the risks within your customers?
Leadership – Do you have the right vision and the right team to put it into practice? What skills does the team need? Does organizational culture support your goals and values? Is there a leadership succession plan?
Recognize that the value is more than what your bottom line shows. There is also intangible value in a business (such as the strength of systems and processes, organizational culture, strength of the leadership bench and customer mix), and focusing on these factors allows you to build value. of your company.
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The good news is, a lot of it can be measured. A financial statement tells a story, just like customer surveys, employee satisfaction ratings, recruiting trends, and efficiency scores. Monitor these data points to help determine trends affecting your business results and make adjustments as needed.
The final consideration is one that might not always improve bottom lines, but should nonetheless be one of the first areas of focus when assessing the health of your business. To protect yourself, your family and business, and any value generated in the future, it is essential to identify, monitor and manage risk in order to mitigate unnecessary problems. Start with areas that need to be addressed as early as possible, such as estate and property issues, legal, regulatory, insurance, tax, and cybersecurity considerations.
Owning a business is always a personal journey. Stay proactive as you prepare your organization for the future. With your own personal plan grounded in reality and a clear understanding of your organization’s core value, you can begin to build your roadmap.
Truth be told, every business owner operates with some degree of risk. Working with professionals to connect the dots, identify needs, examine leadership and talent gaps, and design financial models and plans for the future can facilitate the process and lead to concrete steps to maintain health. financial.
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