Knowing the state of your company and determining if it is flourishing or falling behind is a very vital and important analysis. If you begin to notice that your company is falling behind, you have to take steps immediately to right the ship. Failure to do so will result in things such as budget cuts, layoffs, and even bankruptcy. On the other hand, if your company is flourishing, you might be inclined to take additional risks, expand the company, or upgrade the infrastructure. All of these things can only happen if you can understand the financial health of your company and how it is doing. Here are some ways to know if your company is flourishing or falling behind.
Liquidity Helps Determine Your Financial Health
When it comes to determining the financial health of a company, one of the first things that get looked at is liquidity. What is liquidity? Liquidity is the process of turning an asset into cash. The more liquid an asset is, the more readily it can be converted into cash. Take an account receivable for example where another company or a client owes you money. While it is not cashed in your hand, it is fairly easy to turn that into cash as all you need is the client to pay you the money that you owe. Therefore, you can say that an asset is liquid. Land on the other hand is an asset that is not liquid. It is worth a lot of money, however, it can not easily be turned into cash without taking the time to sell it and go through an entire process.
How can you determine how liquid your assets are? You will want an accountant to do so as they will create sheets totaling all of your assets and liabilities for you to see. It doesn’t matter where you are in the United States either, as there are accountants in all cities. You can find a CPA firm in Florida if your company is based there to help determine how liquid it is. Now you might ask, why is it important for your company to be liquid?
At the end of the day, cash will always be the most important asset one can have. If disaster strikes or you end up having to make a payment, you are going to be doing so with cash. If your company is not liquid, you will have a lot of trouble making these payments, therefore running into financial trouble. A liquid company on the other hand will easily be able to make these payments and move forward. Looking at the liquidity of your company is a great way to determine if you are flourishing or falling behind.
Check Your Profit Margins
Another telltale sign if your company is flourishing or not is by looking at the profit margins that your company reports at the end of each fiscal quarter. In general, you can sort your profit margins into four main categories. A large profit margin, a slight profit margin, a slightly negative profit margin, or a large negative profit margin. While there is a lot of information that you can gain from the profit margins alone, you have to be able to understand them and consider all factors that influenced that number. Here is a breakdown of how to respond to each of these margins.
A Large Profit Margin
If you are sitting on a large profit margin, then congratulations, your company is doing very well. Take a look at the rest of the industry and try to understand if what you are reporting is an anomaly. If what you are seeing looks like it will become a regular occurrence, look to build off that growth by investing, upgrading, and making wise business decisions. Never get complacent if you are far ahead. If things are looking like an anomaly, still attempt to grow your business, but be ready in case things quickly turn around or drop.
A Slight Profit Margin
If your company has a slight profit margin, it can either be a good or bad thing. If you are coming from larger margins, it is a foreshadow that drastic change has to happen or else you will begin to fall in the negative. If you were recently able to pull your company out of the red, congratulate yourself as better times are ahead.
A Slight Negative Profit Margin
This is the same case as the above situation. If you are coming from positive margins and are now in the negative, you now have to evaluate your business and see where things went wrong. If you are coming from large profit losses, you are just about to break even. Continue with what you are doing as it is a sign your company is beginning to flourish.
A Large Negative Profit Margin
If you find your company losing money left right and center, it might be time to make layoffs or even downsize the company. Nothing is off the table when it comes to decision making as your company is falling extremely far behind and soon it will not be salvageable. Look at your business models and see where you are failing and quickly create models to help correct the ship.
Understanding these four areas and knowing if your company is flourishing or falling behind based upon the situation is key as a business owner. Not every negative situation is bad, and not every positive situation is great, evaluate everything and be ready to act when the time comes.
Are You Attracting New Customers?
The next thing to look at with your business is whether or not you are growing on the client-side of things. While you might have your standard regular clients, are you consistently gaining new business from other companies? Companies that begin to fall behind start to become stagnant when it comes to this. As they are not making technological leaps or innovating the system, clients choose other companies that are doing a better job. Your current clients might be enough for you to get by, but without newer clients, you will not be able to grow your company or keep up with the times.
If you are struggling to attract new customers, take a look at your research and development department along with consulting current market trends. Try to tap into those areas and focus on creating a model that will attract new people. It will go a long way towards helping your business stay ahead if you can do so.
Are You Reluctant To Change?
As mentioned above, technology is constantly changing, and in the business world that we live in. Is your company making an effort to keep up with the changing times and work with the newest technology? While sticking with older technology is familiar and easy, it will quickly become obsolete and your company will struggle to keep up with competitors. A company that is flourishing is taking steps to innovate the market and is ready to do what is necessary to succeed. Remaining stagnant might be comfortable, but it is a telltale sign that your company is starting to fall behind.
What Do Your Expenses Look Like?
Another way to check how your company is doing is to look at your standard expenses for the year and compare it to previous years. Typically speaking, if your company has standard growth, expenses will rise slightly, but they will fall in line with the rest of the numbers. If your expenses have skyrocketed and it is not because of a fantastic break or deal, you are definitely in trouble. Find out what is causing these expenses and determine if anything can be done to lower them.
You want to keep the ratio of expenses to income relatively the same each year and any large deviation is a question mark. Things like old equipment can be the reason why your expenses are exponentially growing, and unless you upgrade, they will continue to dampen your income. Track your expenses and compare them to previous years to see if you are flourishing or falling behind in comparison to other companies.
Take a Look at Your Competition
There is no better way to tell how your company is doing than to look at close competitors in your industry. Once again, take a look at previous years and compare their income statements to yours. Are you starting to catch up to their profits? Are you miles ahead of them? Or are you steadily falling behind? Where you are in relation to your competitors is always an indicator of how you are doing as a company. If you are noticing companies starting to catch up to you, it is a sign that you are either getting complacent, or they have innovated the market. When you see things like this, forecast and create your own models and find ways that you can keep up.
If they have stolen a large part of your market, this will definitely raise some questions about your company and it will be a clear indicator to you that you are starting to fall behind. The longer you wait to act, the worse things will get for you. Always track your company in relation to your competitors to see how you are stacking up with everyone else.
Typically, newer companies take on a lot of debt to properly start. Having all of the funds to acquire land, a workforce, and a building is next to impossible, therefore you have to look to borrow money from others. If your company is beginning to flourish, you should notice these debt ratios get smaller, as not only are you profiting, but you are also able to make payments to them. Vice versa, if your debt is only increasing, it is a sign that you are falling behind. If you fail to manage your debt properly, you will put your business in a position where it can no longer generate any profits and will be forced to shut down.
Are Your Assets Properly Valued
One of the shady tactics companies employ to appear more profitable than others is to overstate their assets on their balance sheets and income statements. Things like technology or cars, for example, depreciate rapidly and should be represented on the financial statements as such. Are you reporting them at the same value each year? If you are doing this to keep your asset values higher than your liabilities, it is a strong sign that you are falling behind in comparison to other companies. These things will catch up to you quickly as well, so ensure that you are taking proper steps to depreciate your assets and accurately state their value on all sheets.
Are you Being Paid On Time?
While having a large account receivable is a great asset to have, it means nothing if you are unable to collect it all. Take a look at the customers and clients you do business with and evaluate their ability to pay for your services. You might have all the sales in the world, but it doesn’t matter if they are coming from people who will take years to pay you. Cash flow is one of the most important things when determining if your company is flourishing or not, and if you have a low cash flow because of the above statements, you will find your company quickly falling behind. Make wise business decisions and ensure the sales you are making are with reputable clients who you know will pay you.
These are just a few indicators to help you determine if your business is flourishing or falling behind. The longer you take to act upon these indicators, the worse it will be for your business. Never sit comfortably, even if your company is showing huge profits, and don’t be afraid to rock the boat if you notice things are starting to go south. A business owner who is ready to make hard decisions and take risks is one who will end up creating a successful company. What do you plan on doing to ensure that your business stays ahead of the rest of the market?