10 Jan The Business Owner’s Cheat Sheet: Working ON the Business
2016 is in the books and a new year starts. Many of the clients I start working with are so busy working IN the business, they don’t take a step back and work ON the business. Have you had the experience in your business where you can’t see the forest through the trees? Here’s a cheat sheet of questions to focus on and ask yourself how you’re doing. To work “on” the business the cheat sheet covers 4 areas:
Profitability: How was my profitability in 2016? Was it up or down against budget, against last year, and the last 3 years average? Be sure to look at gross and net profit. Figuring out profitability drivers can be a challenge, but if you raised prices or increased volume either from new or existing products or clients you likely experienced an increase in gross profit. If you cut expenses or added any expenses that had a positive impact on profit, then likely your net profit increased. It’s important to look at the numbers, but also the percentages too. Once you’ve figured out what happened and why it happened, you’ll have some clarity on some strategies you implemented.
Asset quality: How did my inventory move last year? And what kind of job did we do collecting receivables? Did receivables and inventory increase or decrease and were those changes attributable to sales growth or another reason? Are there any stale assets you should write off? Some times when sales are growing, we don’t pay enough attention to the amount of receivables outstanding or whether we should be billing daily, weekly or monthly? For a $5 million revenue company, a one day change in receivables is almost $14,000 that could be sitting in your bank account.
Liquidity: If “cash is king,” the amount of cash in the bank, preferably internally generated, not borrowed, is a good measure of your liquidity. Is cash up or down against last year? If you get accountant prepared financials, there is a statement of cash flows that comes with your balance sheet and income statement. Quickbooks reports call it a cash flow summary. It tells you what part of your business generated cash or used cash and can help guide you in ways to improve liquidity. A good way to measure liquidity is by looking at it in # of days in sales. Using the AR example in the last section, a one day change in receivables is a $14,000 increase or decrease in cash, 5 days is $70,000. A good rule of thumb is anywhere from 5 to 25 days sales in cash.
Leverage: This is the one banks examine closely. Leverage is calculated by dividing total debt by total net worth. This is a measure of how much skin you have in your business versus your creditors. Did your leverage go up or down last year and why? If you look at your cash flow summary you will see some of the uses of cash in your business, in addition to profits, loans are a source of cash to help you finance those uses. Profits are too. Banks seem to start getting heartburn if your leverage is higher than 3 or 4 to 1.
After you’ve looked at these 4 items you are well on your way to working “on” the business and developing a game plan for what strategies and execution you want to focus on in 2017. If you have further questions on working on your business, please contact us and leave a message or email. I hope 2017 is your best year yet!