There are many ways to drive a company into the ground and not even know it. It’s usually not a total surprise when a company crashes, but most owners usually don’t really have a sense of when or how bad the crash will be.
Ironically, most companies that are doing well also don’t know how well they are doing and they usually don’t know when to make the all-important moves to capture new opportunities.
So how can you tell if your company is healthy? Here are 3 big indicators that usually tell the story:
3 Important Indicators of Health
1. Total revenues growing faster than total expenses. Even if revenue is flat, expenses should be flat or dropping in order for a company to survive long term, and when revenues are declining, expenses should fall faster. Regardless of economic climate companies must always focus on “Growing profitability”
As the US economy works its way out of its worst recession on record, small companies are performing significantly better than the overall economy. On average, service companies under $5M show their annual revenues growing at 22% and expenses growing at 14% – this tells us that the community as a whole is headed the right direction. Are you?
2. Cash balances showing positive long-term growth. It is normal for growth to require cash, but over the long term (12 months) revenue growth must result in cash growth or is not sustainable. Short term investments in revenue growth which yield more cash is a healthy sign of “Growing liquidity”.
On average, service companies under $5M show their cash balances growing at 13% and revenue growing at 22% – this tells us that the community as a whole is headed the right direction. How is your cash balance?
3. Current Ratio showing a long-term positive trend. Regardless of company growth rates, if current assets are growing faster than current liabilities, the company is building strength and will be able to absorb monthly financial bumps and invest in its future. Improving the current ratio is all about “Growing leverage”
On average, service companies under $5M show a current ratio of 3.3, which means they have $3.30 in current assets for every $1.00 in current liabilities. More importantly this ratio is trending upward at an annual rate of 36% which tells us that the community as a whole is strong and headed the right direction. Is your current ratio headed in a positive direction?
Of course there is more to a business then these 3 indicators, but if 2 or more of these are coming up negative, there is a good chance that the company needs some serious adjustment. And when all of these indicators are pointed in the right direction it is time to consider bigger options for growth such as acquisitions and addition of new products and services.
One major caution to consider: you can’t grow your way out of fundamental financial performance problems. The cardinal rule is, fix underlying processes and get a solid footing before you expand your business. Growth on an unstable foundation often ends in a faster crash landing.