The beginning of a new financial year is a great time to perform a health check on your small business to identify any problems and ensure all of your systems and procedures are working optimally. However, if you still have this on your “to do” list, now is a good a time as any to get it done!
The costs of not doing such health check can be high. There could be negative impacts on cashflow, increased financial risk, reduced competitiveness and, ultimately, lower profitability.
Elements to include in the health check are assessing cashflow management, examining financial ratios, looking over your customer base, monitoring customer feedback, performing a tech audit, checking staff satisfaction and reviewing stock balances.
Assess cashflow management
It is critical to ensure that the correct procedures are in place to maintain a healthy financial position and enable growth. This might include:
- Cashflow forecasting – to ensure that cash is available throughout the year or give you advance warning of a likely shortfall.
- Looking at alternative small business cashflow solutions – look at alternatives such as invoice finance, or factoring, which don’t require personal property as security.
Examine financial ratios
Financial ratios are the key accounting metrics for checking the financial health of your business. They will reveal which areas of the business are operating most efficiently and where changes need to be made.
The key ratios to examine are the liquidity ratio (also called current ratio) which measures a business’ ability to pay debts by comparing assets to liabilities; the quick ratio which indicates a business’ ability to pay its current liabilities by showing the amount of liquid assets available compared to current liabilities; and the profitability ratio, which shows how well the business can generate income against expenses and other costs and therefore reflects business performance.
Look over your customer base
Taking a look at your list of customers can reveal a lot about the health of your business and where opportunities for growth might lie. If your customer list is predominantly older people, there is an opportunity to increase sales by marketing to younger people. Looking at the geographical locations of your customers might also provide some insights.
Monitoring feedback from customers is a great way to learn about their preferences and behaviours. It is also an effective way to manage dissatisfaction and deal with it before it spirals out of control. With the ability to amplify dissatisfaction through social media, it is now more important than ever to nip it in the bud.
Do a tech audit
Ensuring that tech applications such as accounting software remain up to date is crucial for maintaining the ongoing efficiency of your business. When shopping around, always ask vendors what reports their software can produce and run a trial using your business data before making the final decision.
Check staff satisfaction
Many business operators forget or are unaware that their most valuable resource and key differentiator between competitors is the quality of their staff. There is a positive correlation between levels of staff satisfaction and productivity. In 2015, the Harvard Business Review quoted studies by the Queens School of Business and the Gallup Organisation which revealed that companies with low employee engagement scores had:
- 18 per cent lower productivity
- 16 per cent lower profitability
- 37 per cent lower job growth.
Review stock balances
It is advisable to conduct a stocktake every six months to stay on top of inventory management. Tips to improve inventory efficiency include:
- Dispose old and slow-moving stock.
- Review purchasing policies to minimise over-spending on stock.
- Write off excess stock.
- Track high-cost inventory items using tracking software.