Financial Performance for Business Health
In our last blog 8 Indicators of Business Health, we shared the things we look at when determining the overall health and value of a business. Knowing these indicators can help you build the value to deliver optimally for as long as you own it, and, importantly, when you’re ready to sell or transfer to another owner. Now, we’ll dig into each of those 8 indicators, starting with #1: Financial Performance.
Looking at Financial Performance as an indicator of business health is certainly about the money. But it’s not all about the bottom line. Business finances are complex. EBITDA, liquidity, debt ratios, and the list goes on. Comprehensive business assessment and performance require close scrutiny of the full P&L Statement and Balance Sheet at the very least.
But to establish a baseline, there are three simple aspects of Financial Performance that we can use as a starting point to help determine business health and transferability:
Trends / History
Forecast / Plans
Past Financial Performance and Trends
There are a few key items to look at in terms of history and trend information related to Financial Performance.
First, we need to know the pre-tax, market-adjusted profit margin from the prior fiscal year. Market-adjusted means that we need to be sure profits are not under or over-stated based on the owner’s own salary. So, we would calculate this number using the market rate for what you would need to pay someone to replace you, not necessarily what you actually took out as your own salary.
Next, we look at annual revenue (or sales) in the prior year. Finally, we need to see the year over year trend in annual revenue. Did revenue increase, decrease, or remain neutral compared to the prior year? By how much did annual revenue change?
Forecasting Financial Performance
Accurately forecasting annual revenue is simple, but not always easy. The main thing we look at in terms of forecasting Financial Performance is directional. In the next 12 months, do you expect sales to go up or down and by what general percentage? This may lead to further exploration of what is driving the changes you’re predicting.
Financial Performance and Record-Keeping
It’s not just about the numbers in the books, it’s also about how easy (or difficult) it is for others to see what’s happening with your finances. Clear, proper, compliant reporting is essential for any business valuation. Who does your financial reporting and by what means they do it can be a signal of overall health or potential issues.
The Other 7 Indicators of Business Health
Stay tuned for future blogs diving into the other indicators that complement Financial Performance:
Consider the Alternatives
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.
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