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What does a healthy business look like? Top assessment criteria

by Richard Pepler, CEO of Optimum Finance

It’s a common story. A new business is launched, proves a big hit, grows quickly and appears to be a huge success. It takes on more staff, moves into a bigger premises, attracts bigger contracts, then suddenly, out of the blue, it collapses.

More than half of new UK businesses don’t survive beyond their first five years.

So, what goes wrong?

The answer is usually a simple one, cash flow.

It doesn’t matter how long your order book is, if you run out of cash, your business won’t make it. There are numerous ways this can happen.

We often hear SME owners blaming the tax system, lack of bank lending, late payments, all of which do make things more challenging, but with effective management none of these hiccups should be fatal.

The key is keeping close tabs on your business to ensure it remains healthy and spot any potential dangers as early as possible.

During almost four decades working in commercial finance, lending to small businesses for a wide variety of reasons – from supporting their steady cash flow to assisting with capital expenditure projects – I’ve watched with frustration as dozens and dozens of companies fold needlessly due to poor oversight.

So, here are the key tools every business owner manager should refer to regularly to ensure their business is in great shape.

Cash flow forecast – this is probably the most important document for a business owner and yet based on our own research, many do not even have one and have no idea what their cash flow forecast is.

Protecting and maintaining strong cash flow is the number one rule in running a business. Your cash flow forecast should detail where and when money is coming in and out of your business to ensure there are not going to be any shortfalls. If there is a danger of a client defaulting on their debt, take swift action to protect yourself against this, whether through a CCJ or taking out debtor protection which insures companies against this.

A flexible lending facility or invoice finance provider, which will enable you to draw cash against the value of your unpaid invoices, can also be a big help. Where wanted, invoice finance providers will also take over your credit control, saving precious staff time while ensuring you get paid. An invoice finance facility is like an emergency reserve or back-up you can turn to if any of your usual revenue streams get cut which can happen for a wide range of reasons, particularly at times of economic uncertainty.

General forecast – business owners need income and business projections in order to plan key commercial decisions such as recruitment needs, new premises, stock orders and much more. Your forecasts should show solid revenue streams and a good future order book balanced against any future outgoings.

It is not possible to make an informed decision on any big business decision without accurate and regularly updated forecasts. This enables business owners to see when an inbalance of income versus outgoings is likely long before it happens and take action to prevent it.

Management accounts – with numerous user friendly online accounting systems designed for SMEs and accountants, businesses can now easily keep up-to-date management accounts. Financial reporting can now be completely automated enabling companies to keep track of their performance against forecasts, targets and budgets. It also allows business owners to compare their performance with previous months and years.

All this is vital if businesses are to identify potential issues as early as possible and take the necessary steps to address them before they begin to affect the stability of the company and risk its future. If there is a dip or contraction in company revenue, this will show up immediately in the accounts and enable the business to make the necessary adaptations or savings.

New business pipeline – most businesses are only as successful as their client order book and as anyone who has run a business knows, clients can be fickle. This is often no reflection of your business performance. Clearly if you do a great job you are more likely to maintain clients but even longstanding loyal clients cannot be relied upon to stick with you forever as exterior economic and financial forces can mean they have to cease the contract. In times of economic difficulty, client businesses may even fold. So, it is important to always have a strong new business pipeline of potential new clients to pursue. That way, if you do lose a key client, you can be confident of replacing them before too long.

If all of these business analysis tools and metrics show healthy cash flow, future income and orders then you can reassure yourself you have a healthy business. If, however, forecasts show a shortfall income against outgoings and your revenue looks likely to dry up, now is the time to take action before it becomes fatal.

Categories: Blog