As you spend your energy, time, resources and talent building your business, there will be moments when you question yourself. How am I doing? Am I making it? Am I earning money from it? Is all the trouble worth it? Am I still enjoying what I am doing, or has the business become a big burden?
As a founder, you have to always question yourself and the value of the ideas that you have. Despite all your best efforts, you may feel that your business is not moving in the direction you hope it will be. Self-assessment and benchmarking should be part of your daily management process. Feedback and realistic self-appraisals using various tools will help you build a stronger business and maintain your positive attitude towards your business.
By knowing what and how you are performing, you will be able to know how to move on. Having this kind of information on your hands will help you, for example, ascertain whether your business will qualify for a bank loan, or if you can now afford to buy that ultra-thin laptop you saw on television.
There are several tests to help you determine how well (or how bad) your business is doing. However, you need to be careful in applying these tools as circumstances differ. A 2-month old business should not be evaluated with standards suitable for a business that has been in existence for five years.
Are you achieving your goals?
Every now and then, you need to gauge how your business is performing vis-à-vis your personal goals. Check with your business plan (this is one reason why you need to have one!) if you are accomplishing what you have set out to do. Have you launched your product as scheduled? Were you able to get investors on board as you planned?
You also need to compare the performance of your business with the industry as a whole, as well as your close competitors. How visible is your business relative to your competitor? If you are running an online business, for example, how many unique visitors are you getting compared to your nearest competitor? What is your market share? Are you growing as fast as your industry? Your business does not operate in a vacuum, and you need to be responsive to what is happening around you.
Are you paying your bills?
A clear indication of how well your business is doing is whether you are able to cover all your business expenses. If you are, then you are definitely on the right track. But if you are not, then you need to examine ways you can improve your operation. Maybe you need to be more aggressive in collecting your receivables, or you need to cut down on your inventory and costs. Maybe you need to get out more and spread the word out about your business. Or maybe (and we hope not), you selected the wrong business and it is time for you to pack your bags.
Do not expect, though, that your income for your first six months of operation will allow you that much-coveted Jaguar sports car (unless you are really, really lucky). Be patient and nurture your business well. If you play your cards right, your business may be able to provide you with a comfortable lifestyle, vacations, nights out, insurance premiums, and even a retirement plan.
Are you making more now than you were an employee?
You left your job for the financial nirvana that you thought opening your own business would give you. But are you earning more now as an entrepreneur, compared to the salary and wages you would have received had you remained as an employee? Also check out the current going-rate in the job market for someone of your qualifications and experience. If you will earn more as an employee rather than as a business person working 15 hours day, seven day weeks, then maybe it is time to reconsider your decision particularly if your long-term prospects are as bleak as your present situation.
If you are an investor in your business, will you earn money?
Entrepreneurs operate their business with their all hearts and passion, that sometimes they fail to see its misgivings and weaknesses. Remove yourself in your position right now, and see yourself as an objective investor may view your business. Then ask yourself, “If I put my money in this business, will it give me a hearty return for my investments? Are the prospects bright for this business? Is there sufficient demand for their products or service? Does this business have a tremendous growth potential?” If you think that the business will yield less than the prevailing rates, you might want to consider putting your money in an alternative investment and finding a job.
What does your financial reports say?
The best indicator for the state of health of a business is its financial numbers. Simple financial ratio analysis can tell you the financial strengths and weaknesses of your business, as well as point you to appropriate action when necessary.
There are several rules of thumb for recognizing a healthy business.
- Current ratio, which is the ratio of your current assets to current liabilities. Generally, a ratio of current assets to liabilities that is at least 2 to 1 is good. To improve your current ratio, you can either increase your capital through equity or debt financing; or decrease your liabilities by paying off some of your debts.
- Quick ratio test, which is calculated by dividing total assets (Including cash on hand, plus government securities and receivables) by current liabilities. This ratio is a measure of liquidity, particularly where your business will be if there is a crisis. A quick ratio of 2.0 or better is considered acceptable.
- Debt-to-equity ratio compares the total debt of your business with its net worth. Total debt is divided by net worth. Although debt adds risk, a debt-free business may not be able to grow fast enough. The whole reason for using debt is to help grow the business and increase the owners’ return on capital. A debt-to equity relationship that is lower than 1 is considered good for a business.
There are other financial ratio analyses that will be of great help to you in managing your financial situation. Remember, though, that while financial analyses can illuminate you about your business; it cannot tell you everything about your financial performance.
How are your sales doing?
Your ability to get business and move your inventory are your best assurance that you have a future in your business. Study your sales numbers thoroughly, and track how it is growing relative to the previous year and the previous month. While some products are seasonal, you need to stop and rethink your strategy is you are continuously seeing a decline in your sales. More so if sales of your competitors and your total industry are growing, while yours are plummeting down. Your sales figures can tell you whether your marketing efforts are effective, your distribution mechanism are working well, and whether a strong demand for your products still exist. At the very least, your sales and earnings must be keeping up with the inflation rate.
How do you compare relative to others?
While you may think of your business as unique and different, you also need to know how you stack up compared to your competitors. Knowing as much information about your industry and your competitors will provide you with valuable lessons you can apply to your business. Are there industry-wide standards that you need to comply? Are there opportunities that your competitors are not tapping? How can you improve your performance relative to your nearest competitor?
Are you making profits?
Let’s face, making money is what being in business is about. Look closely at your bottom line, and determine if it commensurate the pressure, headache and long hours you put in your business. Are you losing money or just breaking even? When can your business profitable? Do you have the resources to operate until your business gets out of the red ink?
You also need to look closely at your individual products and service categories. What product categories or who among your clients are bringing you the most money, and how much time do you give them? You may be giving most of your time to your marginally profitable products. This information can help you weed out unprofitable products or clients, and focus your resources on those that bring you the most money.
You might be better off employed by someone else and secure in the knowledge of a regular and steady paycheck, free time and 8-hours workdays. Note, however, that businesses often show a loss, or minimal profit during its first year, but may show great improvement during the second and third year as the business matures.
How do you feel about your business?
Perhaps the best indicator of all is how do you feel about your business. Is your business giving you what you were looking for? In addition to financial considerations, many entrepreneurs start their own businesses for a variety of personal goals — perhaps greater time with your family, higher income, more leisure time, and improved quality of life. Or is your business failing to fulfill the personal goals you have when you started? Do you still have the passion with what you do, or are you simply burnt out that you want out as soon as possible?
In the final analysis, only you can tell if the business is still worth it. You can only succeed in a venture that you are most happy with.
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- How Much Money Do You Need to Start Your Small Business?
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