How Healthy is Your Business?
Give your company a financial health examination to determine if you're in good health or in danger of becoming ill during these tough times. Dr. Jeff Cornwall, who heads up the entrepreneurship program at Belmont University in Nashville, TN (and who's been a guest on Build Your Business Radio) suggests that you examine certain key indicators and, if you're not in good shape, work now to cure your problems. I interviewed Dr. Cornwall to find some critical areas to explore; here are his suggestions.
Cash flow
The adage, cash is kind, can't be repeated too often. Even if your sales are still steady, cash flow may not be as sound as you'd like. In this tough economy, customers may pay you slower than usual and banks may reduce or eliminate your line of credit, which directly impacts the money you have to pay your bills on time. Carefully monitor cash flow using free or low-cost solutions, such as MyBizHomepage.com (it works for QuickBook users and is free).
Ideas for cash flow management:
- Create an emergency fund to ensure you can cover your expenses. Start building a 30-day fund and grow from there. Creating the fund is possible if you build savings into your budget.
- Reduce or eliminate credit to customers so they pay immediately. This avoids collections problems.
Debt
Whether a business grows or struggles, it's surprisingly easy to take on debt. To be a healthy company, you need to limit your debt-to-asset ratio to 20%. If the ratio is 50% or higher, you risk losing your line of credit (even if not cut, the line may be slashed).
How much debt do you have? Be sure to count lines of credit, equipment loans, construction loans, and credit card debt along with any conventional bank loans.
Also, maintain your personal FICO score to preserve your borrowing capacity. A score of 700 or better is necessary in this credit environment. Check your FICO score and, if necessary, work to repair your personal credit (use a free FICO score estimator from Bankrate.com) to see if further action is required.
Customers
Has your customer base diminished subnstantially during this recession? Make sure you're not relying too heavily on one or two big customers; their departure can effectively put your company into cardiac arrest.
Continue marketing to bring new blood into your customer base.
Industry
Certain industries have been harder hit by this recession than others. While credit counseling has been booming, construction, restaurants, and various entertainment venues have been hard hit.
Stay alert to trends in your industry so you can make strategic moves and avoid trouble. Your trade association may provide data that can help you follow your industry.
Barbara Weltman, author of several books including her most recent, 1001 Deductions & Tax Breaks 2009
www.barbaraweltman.com
Copyright 2009. All Rights Reserved.
