Know Where to Focus, What to Fix, and How to Put Business Health First
Business health is about more than just money. Don’t get us wrong - money is high on the list. But whether you’re working to fund your own retirement, leave a sustainable legacy for your family, build something bigger or eventually find a buyer, there are eight important indicators of how healthy your business really is.
8 Essential Business Health Indicators
1. Financial Performance
As we said above, when it comes to business health, money always matters. But real health is about more than just revenue or even profit. Are your earnings going up, down, or are they stagnant? What is the trend? What is the forecast? Another financial indication of business health is the quality of reporting. Are your books clean, compliant and consistent? Do you have the proper reporting in place to allow others to quickly see the value of your business?
2. Growth Potential
Business health is not just about today - it is also about tomorrow, next year, and on into the future. A stagnant business, even a healthy one, is not as valuable to you or to others as one that has growth potential. Where will future growth come from? It could be organic growth through cross-selling, upselling, or entering new markets. Opportunities could also come in the form of expansion through acquisition or mergers. What is the growth potential and trajectory for your business?
One thing assessors, lenders, investors, and buyers look at when valuing a business is independence. This can take many forms, for example, independence from customers, employees, suppliers or products. If your business is overly reliant on one entity in any of those categories, it might be a concern. In other words, business health is related to your ability to weather the loss of major customers, assets or partners. If your biggest customer jumped ship, could you stay afloat?
4. Cash Movement
The movement of cash, or cash flow, through a business is another critical element of business health. If you’re in good shape, you’re able not only to generate positive cash flows now but also to maximize long-term free cash flow. That means the liquid assets of your business are growing so that you can reinvest, settle debts, survive a downturn, and pay yourself and other investors/owners/shareholders. Is your cash available, or is it overly tied up in assets or debt?
5. Recurring Revenue
Another good indicator of business health is the existence and/or potential of recurring revenue. For example, subscription-based business, retainer contracts, auto-renewal, and long-term contracts all generate a steady, predictable stream of income versus the uncertainty of project-based or hourly billing. This serves as a safety net, so the business can maintain operations and good standing even while pursuing new or incremental sales, especially for companies with a long sales cycle.
6. Value Proposition
Your value proposition articulates differentiation. The depth of your differentiation is an indicator of the degree to which you can charge a premium. In a monopoly (absolute differentiation), you have control over your supply chain and your pricing. Most companies don’t enjoy that extreme level of control, but to the extent that the brand differentiators can be monetized, differentiation is an indication of earning potential, and thus also of business health. Can you charge a premium for your products or services based on differentiation?
7. Customer Score
Your customer satisfaction scores and other measures like loyalty or Net Promoter Score (NPS - a measure of overall rating and likelihood to recommend) can also serve as indicators of business health. Businesses with higher customer satisfaction scores tend to have higher potential for “stickiness” over the long term. A “sticky” brand is one that is able to retain customers, which is more profitable by a factor of five than winning new ones.
8. Owner Dependency
This is our term for the level of dependency of a business on its owner. For true business health, it must have ongoing value, and to do that, it must be sustainable with or without its current principals. That means establishing a management structure, with demonstrated strength and effectiveness. No matter what direction the business takes in the long run, bolstering the organization with the right leaders will reduce the dependency and increase the value.
Join the conversation on LinkedIn, and watch for future blogs digging deeper on each of these indicators!
Consider the Alternatives
Whether your goal is to sustain or to sell, business health is the only way to get the most out of your life’s work. If you’re ready to assess the state of your business and/or work toward a healthier state, there are a number of ways to approach the process. Learn more and/or take an assessment.
We are the W Alexander Group, headquartered in Cincinnati. We are not consultants or business brokers. We are private minority investors who work in active partnership with owners to provide an alternative to selling their business now through strategic and operational initiatives. Our uncommon approach protects owner equity and provides an interim step, allowing for a more planful change and down-the-road sellability when you are ready to transition.