Are you ready to sell your company to someone else? Is your company prepared for that transition? Before answering these questions you need to be ready to determine if the company has the financial strength to be viable on the market itself. Knowing your own company’s strength will help you position it for sale and develop interest from a stream of qualified buyers who can build off the success you’ve already established.
Knowing the right measurement tools is an excellent starting point for any existing company. This means thinking about business objectives, stage of life cycle, time horizon, and economic conditions in place to be successful. Furthermore, you have to know your company’s financial performance and how that compares to other similar companies and competitors.
The primary elements to look at are liquidity, profitability, and solvency to determine where you company is at and what you can do to improve that situation. Profitability looks directly at your businesses ability to create a positive net income or profit for any level of investment or sales. There’s a good chance that if you’re considering selling your business you’re already profitable. This will certainly be an issue of chief concern for anyone in the space of preparing to buy your company- they want to see that it’s already profitable before they step in at all.
As for liquidity, this looks at your company’s ability to meet short term commitments based on current resource demands. The current ratio, for example, looks at the value of the company’s present assets that could be easily converted into cash in the next 18 months and then at the size of the company’s current liabilities. You can also look at the accounts receivable ratio, too, to get another perspective on liquidity.
Finally, solvency explores the company’s ability to meet principal and interest payments on long term debt obligations. The debt ratio is the number you probably already have on hand to help you get a handle on this in your own business.
These metrics are just a few examples to get started with- they are certainly not the only ones you can or should look at when you’re thinking about your time in preparing the company for a possible sale.
If you know that selling your company is on the horizon for you, there are a lot of different things to think about. Retaining the services of an experienced business broker goes a long way in giving you the support you need to uplevel and make necessary changes sooner rather than later.
Are you ready to sell now? A chat with our business brokers is recommended for you to discuss how this might work and to put the necessary action plans in place.
If your online business is making money, that’s great. But don’t rest on your laurels, and don’t assume that your company is financially stable. It might be, but true stability means if an unexpected problem comes along, such as a drop in sales or loss of a steady customer, you’re prepared to weather it. To be certain you’re in the right position to do that, now would be a good time to analyze your cash flow and see how well it holds up against a variety of negative scenarios.
Where to start? The best place is with your production and overhead expenses. Look at your costs per unit and your profit margin per unit at your current sales levels, then calculate what your profit margins are going to look like if you get a drop in sales. You should look at how a drop in sales could impact your inventory.
Another smart move is to create a cash flow budget. It should chart when you get paid for products or services, and when payments your business makes are due. This is a good way of understanding when you may need extra cash to pay bills – and if those necessary funds are available. Analyzing your cash flow budget can help you determine if you need to:
You can also revise your annual budget to see how it looks based on different sales levels. That can help you determine what kind of budget you need in the event of a drop in sales and give you a better sense of whether you can still bring in a profit.
Additional ideas include:
To get a better sense of your company’s financials, review your financial key performance indicators (KPIs). These are the measurable values that determine how effectively you’re achieving your business goals.
These select metrics measure progress toward strategic goals and can help direct how you drive growth in the future. That’s why all companies need to identify which KPIs are the most meaningful to their business.
KPIs offer valuable insights into the financial and operational strength of your business. Each one is a snapshot of the business’s health at a specific point in time.
You want to be certain that KPIs are being used to analyze important trends over time. That can include comparing your business with similar companies.
So, what are Financial KPIs?
They are high-level measurements of:
Your financial KPIs will likely fall into one of five categories:
Financial Metrics are important to your business because they help you steer your company in the right direction and stay focused on the big picture and your long-term goals.
They can also inform you when operations are running smoothly, and present warning signals. These can help you achieve your most important goals over the long run.
All businesses benefit from having KPIs that help determine how well the company is performing, and where improvements are needed. Once you determine your business goals, automated KPIs are an effective method for tracking your performance. That can include having them updated in real-time through the simple method of integrating the company’s accounting and ERP systems.
Automating KPIs helps companies, regardless of their size, direct more of their resources to analyzing the data so they can plan solid long-term strategies.
To check your company’s financial stability, you should also consider evaluating your:
Be certain to maintain up-to-date bookkeeping records, and to create an annual budget. Review your payroll and payables frequently.
Another smart move is to prepare a comprehensive cash-flow forecast and to periodically evaluate your pricing strategies.
Ensure your business is fully compliant with all federal and state rules and regulations and monitor key financial indicators. That should include:
Financial distress can be a challenge for companies regardless of size or industry. It happens when your company (or you as a solo entrepreneur) can’t generate enough revenue to meet your financial obligations. This can happen if your revenue flow is sensitive to an economic downturn, has high fixed costs or a large degree of illiquid assets, or is suffering from:
It can be devastating to your business if you ignore the warning of financial distress, whether in the early stages or rapidly progressing. Allowing the situation to get out of control means you can lose your business or end up filing for bankruptcy.
How does financial distress happen? If you’ve had a slowdown in sales or if your spending has increased, your company may no longer be able to meet its financial obligations. If you end up in bankruptcy, that can do lasting damage to your creditworthiness.
In this situation, businesses often need to restructure their debt, cut back on costs, or look for ways to boost sales.
It’s helpful, then, to understand the warning signs of financial distress in advance.
Once your company has come under financial distress, it can be challenging to secure new financing. The market value of your business could fall, and customers could look elsewhere to buy similar products. Suppliers could start charging more for their terms of delivery.
What are the signs of financial distress?
Those signs could include:
Fortunately, there are ways outside of bankruptcy to remedy financial distress. That’s why it’s important to continuously review your business plans, operations and market performance. Cut costs whenever possible.
You might also want to consider restructuring your debts, including changing the repayment terms to improve liquidity.
No business can survive long without cash flow, which supports your daily operations and enables you to focus on growing the company. At the same time, any business with ineffective cash flow management can quickly become strained financially.
The importance of cash flow management can’t be understated. There are practical strategies to help you optimize your business’s financial health. You want to do more than just stay afloat – you want to be thriving. Here’s how you can do it.
Cash Flow Management has always been a cornerstone of any company’s financial health. It’s all about monitoring the movement of cash in and out of your accounts, from tracking incoming revenue from sales to reviewing outgoing expenses for operational costs or debt payments. The most efficient cash flow management is going to help your business make smart, informed financial decisions that lead to long-term growth.
It’s about cash inflows — the revenue you generate – and outflows – the expenses you pay. Monitoring both helps you understand how sound your current financial standing is.
In a sense, effective cash flow management is a bit like predicting your future financial health. If you develop a system for forecasting cash flow accurately, future decisions will get easier on everything from investments to inventory to your marketing budget.
That’s why effective cash flow management is vital for all businesses, regardless of size.
If you’re eager to effectively manage cash flow, monitor and manage your cash inflows and outflows.
Leverage is a tool for using borrowed money to make investments in your business. Businesses often use leverage to fund growth, such as:
Not all companies are averse to borrowing money as opposed to using equity or selling assets. Leverage by issuing bonds or taking out loans can make the owners feel like they have stronger control over the company. That’s particularly true of small businesses and startups lacking in capital or assets who seek out small business loans or business credit cards to finance business operations and help get the company off the ground.
Some businesses are also using debt to Invest. Some entrepreneurs take out loans or lines of credit to invest in the stock market, for example. Some common debt-based investing strategies include taking out a home equity loan, or using a credit card cash advance, especially if it’s a low-interest credit card.
Debt can actually be a strong tool for building wealth, and it’s used by the largest corporations across the globe, which employ debt that gets leveraged for expansion and growth.
Defining debt as borrowed money that will need to get paid back later, it can be:
In most instances, the borrower pays back the loan with interest. So, how can you leverage debt and improve financial opportunities?
Start by building your credit. A strong credit score is likely to open up better loan terms in the future and to help you find new opportunities to leverage debt.
Always seek out low interest rates on loans.
Consider investing some of your money into education – specifically, to continue your job training and enhance your skill set.
Consider investing in high-yield assets, and whenever possible, take advantage of tax deductions.
Financial statement analysis is a strong tool for evaluating your company’s financial health and performance. It’s going to give you greater insights into your operations, assets, and cash management. A lot of informed decisions can be made from this analysis, which is typically done for decision-making purposes.
Financial statements record a company’s most important financial data and let you review your business’s activities and evaluate past, current, and projected performance. Financial statements are typically built around:
There are common techniques used in financial statement analysis. The most important include:
A Horizontal analysis compares the values of line items across two or more years, while a Vertical analysis studies the vertical effects line items have on other parts of the business. A Ratio analysis studies ratio metrics to determine what their statistical relationships are.
Financial statements are perfect for business management evaluating overall financial performance. Analysts typically use multiple years of data when they’re conducting a horizontal analysis, while a Vertical analysis reviews each financial statement to best understand how different categories influence results.
To be certain of your business’s financial health, you want to be certain you understand:
First, ask yourself: Are your finances healthy? If you can’t recall the last time you reviewed your financial situation, it’s time to start. You want to regularly perform a financial check-up to ensure your finances stay healthy. If your finances are shaky, you want to know that now.
A financial health check helps you determine:
You want to be constantly working to reach your financial goals, to ensure you’re exactly where you want to be financially.
Doing a regular financial health check-up can help lead to smart money habits and solid financial planning for the future. You are more likely to succeed in those goals if they are:
These are smart goals. Getting specific with your financial goals is the first step in conducting a financial check-up. You need to understand where you stand financially, be able to track your spending, make adjustments to your budget when necessary, and continuously check your credit report.
Doing so will help you be certain you’re on the right path financially.
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