How to Check Up on a Business: Everything You Need to Know
Check out these steps on how to check up on your business and make sure you are on the right path.4 min read
Steps for how to check up on a business are as shown below:
- Check profitability
- Observe cash flow
- Study your balance sheet
- Make projections
- Evaluate your product or service
- Update and enhance the business
- Ensure a quarterly inspection.
Entrepreneurs tend to measure profitability and try to achieve it by focusing on the raw cash rather than observing and managing margins. The margins measure how much profit in cents your business is earning on every dollar of investment you make. It's a more reliable indicator of how much buffer your business has to survive the moments of poor sales.
Observing the margins also helps to indicate how easy or difficult scaling the business will be. Observing the increase or decrease in the margins of your business's profitability will reveal a lot about your company's health. It's also important to keep track of your progress. For instance, if your business is succeeding:
- How did you achieve its success?
- How much money did you invest to get it there?
- How long did it take to get there?
Observe Cash Flow
Some businesspeople and finance professionals tend to overlook their cash flow statements. However, the cash flow statement of a business is one of the most important indicators of its financial health. The cash flow statement from operations is especially important because it shows how much operational cash went in and out of the business within a given period. The operational cash flow statement works by pulling financial information from the income statement and the balance sheet alike.
Profit isn't always the same as cash. For example, if you sold $2,000 worth of products and those sales are all in accounts receivable, you can't pay your due bills or reinvest money into your business with the profits in accounts receivable. This is because such profits aren't available for spending yet. Therefore, until you develop and maintain a workable cash flow culture, you'll have trouble running the expenses of your business and scaling the business up.
Study Your Balance Sheet
Look at your balance sheet, take note of the average accounts receivable dates, and make necessary adjustments to increase the rate at which your business gets paid. If you don't observe and do something about how your receivables are flowing in, you'll soon have cash flow issues resulting from late payments from customers.
If your company's terms are monthly, its receivables ought to be monthly as well. You can offer your customers incentives to encourage timely payments. However, make sure to build the extra cost into your price.
Find out how much net worth increase your business has had in the last one year. Usually, during the startup phase of a business, progress seems to be slow or completely lacking because of the minimal cash the business has to show for its inputs. However, that's a wrong yardstick to measure progress with.
It isn't enough to have favorable profitability and cash flow numbers. You have to set up a system that helps to track the performance of your business and project its possible performance for:
- A month
- A year
- Five years ahead.
There are several tools that can help with that. However, you're advised to choose a tool with a financial model that has room for adjustments to enable you recast your projections based on variables and costs that are likely to change with time.
Evaluate Your Product or Service
One of the most reliable ways of assessing your products or services is by conducting yearly strengths, weaknesses, opportunities, and threats (SWOT) analyses. Recognize your internal strengths and weaknesses, and also take note of your external opportunities and threats. You can then easily tell what needs to be done for improvements. If possible, find opportunities that might have been missed by your business rivals and take advantage of them.
Update and Enhance the Business
Make sure to update your business plan regularly. Aim for specific goals and discuss your long-term business ambitions and objectives with your mentors and members of your team. Keep in mind that your duty as a leader is to stay focused on how to improve the vision of your company and achieve it.
You can give your business a healthy checkup by looking at its minutest details from a new angle at least every quarter of the business year. You must extract yourself mentally from the affairs of your company and inspect it from the angle of an outsider. You can go further by involving other objective observers through customer feedback, surveys, etc.
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