Just how healthy are the finances of your business?
Obviously we complete tax returns each year and hopefully we monitor progress through the year but this generally focuses on turnover, expenses and profit. It doesn't explain how financially healthy your business is.
I attended a Business Link Planning for Growth Course; they introduced some calculations you can run to determine the financial health of your business and l felt it would benefit other LJN members.
How to determine the trading health of your business
The health of your business is defined by the break even point of the goods and services provided. The break even point can be determined from your accounts and determined the financial health of your business.
To calculate the break even point carry out the following calculations;
Gross Profit = Turnover - Cost of Sales
Gross Profit Margin % = Gross Profit
Break-even Turnover = Overhead*
Gross Margin %
* note: use true overhead so include any personal drawings and/or dividends
Break-even Turnover % = Break-even Turnover
The Implications of Break-even Turnover %
The implications of the break-even turnover % for trading health can be seen as follows;
Break-even turnover >95%: Extremely unhealthy - likely to go bust at first misfortune
Break-even turnover >90%: Vulnerable - probably seeing periodic cash pressure
Break-even turnover >85%: Slightly stressed - manageable
Break-even turnover >80%: Probably OK - sustain or improve
Break-even turnover >75%: Good - safe
Break-even turnover <75%: Excellent - generating adequate cash for growth and dividends
It is recommended the following actions are take based upon the break-even turnover;
Break-even turnover >90%: boost gross margin % and reduce overheads
Break-even turnover 80 to 90%: boost gross margin %, constrain overheads then boost turnover
Break-even turnover <80%: boost turnover while preserving or improving gross margin % and keep overheads under control.
These figures can be calculated yearly, monthly or weekly to monitor performance.
The Business Link Planning for Growth course covered these and other key performance indicators as well as methods for boosting your sales and improve profitability.
Unfortunately Business Link courses will cease to exist at the end 2011 - part of government cut backs! Madness - help businesses grow and they feed the economy! It's not rocket science!
However, the course presenter was from Hard Hat Business distributed a book that the course is based upon:
Summary: If your business has been up and running for a few years and you've been thinking about how best to boost your sales and improve your profitability, this is the book for you...
I'm only a third of the way through the book and it is already proving very informative... will add a full review when finished reading it.
How healthy is my business?
I offer garden design and landscaping, often working alone, taxed as a sole trader with no employees and no regular contract staff.
Last 4 months Break-even turnover = 75% which is healthy.
However my projected year end figures indicate Break-even turnover around 90% which isn't healthy so indicated l need to take action! Yesterday actively started up-selling to existing customers and immediately picked up two pieces of new work.
How healthy is your Business?
Hope this has been of interest, got you thinking, possibly reaching for the calculator but ultimately improves the performance of your business in the future...