Managing a business is difficult. Failure to properly determine your financial condition could severely hurt your business and its survival. To cope, you need to check whether your business is healthy or not. Some people aren’t able to determine how good or healthy their business is. Don’t be one of them! Below are some metrics to look for when evaluating the health of your business.
Debt ratios should be within a manageable range
There are two kinds of debt ratios that you need to pay particular attention to: debt-to-asset ratio and debt-to-equity ratio. Debt-to-asset ratio defines the total amount of debt relative to assets. The higher the ratio, the higher the degree of leverage and the financial risks your business carries. Meanwhile, the debt-to-equity ratio indicates how much debt your company is using to finance its assets relative to the amount of value represented in shareholders’ equity.
Stable cash flows – cater for business uncertainties
Maybe your revenue is increasing, so it’s only natural that you use that income and invest it back into the business. But be wary, if you are not managing the income well, you’ll find yourself asset-rich but cash poor. When something urgent comes up and you are tight on cash, you might find yourself in trouble – especially if none of your assets is liquid. What we’re looking for here is a stable amount of cash flows to buffer for short term cash flow needs. In order to achieve this, you need to focus on your future cash outflows and cater to that.
Your expenses are growing in line with revenues
As your business grows, your expenses will most likely increase with it. But that’s only okay if your revenue is in line with your increasing expenses. In other words, you need to maintain cost-to-income ratio within an acceptable range. You can find out by dividing operating costs, which includes items such as salaries and property expenses, with operating income. It’s fine to have some variance between revenue and expense growth, so long as it’s still within an acceptable range.
Employee Happiness and Customer Satisfaction
Not only do you need to be happy with your job, your employees should be happy to work at your company. Check your employee turnover rates and interview your staff to see whether they feel sufficiently challenged. Unhappiness at the office lowers productivity and motivation and is a sure sign that the environment or system needs to be enhanced. Don’t forget customer satisfaction, either. Survey your customers. Ask them if they are happy with your service. A happy customer will very likely repurchase your product and can also bring new customers for your business. Unhappy customers, meanwhile, can drive away prospective new clients.
There isn’t one right way to grow a business, but you can always determine the health of your small business by looking at the four metrics above. We hope your business condition is not only healthy but thriving!