Listed below are Gens’ 10 keys (questions to ask yourself) to ensuring your business is healthy and running the way it’s supposed to.
Key No. 1: Do you understand cash versus cash flow?
There are only three real sources of funding: investors, banks and businesses. Investors and banks bring cash to the table, even if it is only borrowed. They are more complicated avenues of getting cash and bring their own share of potential conflict. Your business itself is often your best source of cash flow and is frequently overlooked. Look inside your business at accounts receivable (is it time to bill?), inventory and equipment, and overhead and capacity. Every business can better optimize cash flow.
Key No. 2: Is your cash locked up in working capital?
A great source of capital can be found on the left side of your balance sheet. Unlock your cash by making sure your billing and collections are up to date, getting rid of slow-moving or low-markup inventory and reducing equipment that doesn’t get much use. Ask yourself, “What if you couldn’t get money from an investor or bank; what are the opportunities inside your business for cash?”
Key No. 3: Do you have a clear understanding of debt and a good connection with your bank?
There are three types of bank debt: real estate, equipment and lines of credit. Real estate and equipment debt are tied to specific assets or collateral, and have a fixed term (usually three to 10 years). A line of credit is usually tied to working capital (accounts receivable and inventory) and should not be used to fund equipment, expansion or overhead costs. Lines of credit are often tied to temporary or seasonal expenses, and ideally will go to zero during the rest of the year. Make sure you can show your bank that you can pay down a debt, that you have all information at your fingertips and that you can give it to them as soon as they ask for it.
Key No. 4: Do you have the tools for effective management reporting and financial statements?
“Your books,” or your internal accounting systems and reports, are very important to your company. A healthy business is able to fairly easily “close the books” at the end of each month. Keep your financial statements as simple as possible and consider something off the shelf, such as QuickBooks, Peachtree, Dynamics or others. Gens advised outsourcing this part of your business to a CPA or bookkeeping firm.
Key No. 5: What is important to you?
For this test, Gens outlined four questions to ask yourself and the areas of your business to consult when answering the questions.
- What happened yesterday? Accounting.
- What is happening today and tomorrow? Operations.
- What will happen three months from now? Revenue.
- Will I run out of money from either moving too slowly or too quickly? Cash Flow.
Key No. 6: Do you have an understanding that not all sales are healthy?
Examples of unhealthy sales include:
- Too much revenue from one customer;
- not enough revenue from one customer;
- gross margins that are too low to cover overhead costs;
- sales commissions that exceeds gross margin;
- clients who pay too slowly; and
- orders that cause too many disruptions.
To have a clear understanding if a sale is healthy, Gens advised knowing the exact numbers tied to that sale, as well as looking for common trends or problems associated with sales across the board.
Key No. 7: Are you being thoughtful about your financial strategy?
Are you current on paying your taxes? Do your books check out? Are you able to prove that you can pay off a debt so that banks feel comfortable loaning to you?
Key No. 8: Do you have the ability to drive positive cash flow from operations?
Cash flow from operations refers to the amount of money a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities. It is cash flow from operations that will be used to make capital expenditures, design new products, make acquisitions, pay dividends, reduce debt and more.
Key No. 9: Does your budget and forecast plan for what you want to happen?
Understand that if you can’t make it work on paper, you don’t have much of a chance of making it work in real life. Gens suggested looking forward, not backward. If you are running your business strategy by financial statements, you’re always looking at last month’s budget. The key is a budget with a forward-facing perspective.
Key No. 10: Does your business have good advisors and are you communicating well with them?
Your banker, attorney, CPA and others: Are these some of your most trusted advisors and do you bring them in and talk with them regularly? Don’t be too proud to admit when you need some extra guidance.
The COSE WebEd Webinar is just one example of the dozens of educational events COSE hosts every year. Check out the COSE Events page to see if there are any upcoming events that might help you grow your business.