Analyze Your Business – It’s Easier Than You Think!
In the previous article in this series we discussed solidifying your business vision. You envisioned what you want your business to become and you wrote it down to give it the strength of being visual. If you haven’t done this for your business, consider doing so before you start to analyze, so you’ll have something to compare your findings against. Your vision is your point of reference.
By analyzing the state of your business now, you can begin to see where you are in relation to where you want to be. These two points will allow you to create a direct line between them. We’ll talk more about creating the strategy and developing your plan of action in a later article.
Here are the questions I suggest you ask yourself to determine where you are.
What is your vision for your business?
Do you have a “mission statement?” If so, what is it?
Do you have an annual operating plan?
Do you have a marketing plan? Is it in writing?
If so, when was the last time it was updated?
List your products/services in descending order of their contribution to total revenue.
Who is your target market for each product/service listed above? These may be the same or different.
What marketing activities are you conducting?
What sales activities are you using?
Who are your high gross margin customers? What characteristics do they have in common? (Gross margin is the difference between income and cost to produce or provide. General operating expenses are deducted later to leave net profit margin.)
What would you say are the main strengths of your product or service?
What are the weaknesses? (Be honest here — this is meant to be a learning tool)
List your 3 primary competitors and their main strengths.
What were your total revenues in your last fiscal year or calendar year?
If you are in business less than a year, what are your revenues to date and your projected revenues for this year?
Which of the following numbers do you monitor monthly?
___Accounts Receivable (if applicable)
___Aging of Accounts
___Frequency of Unexpected Expenses
___Inventory (if applicable)
___Cost per Unit Sold
___Cash Reserve or Debt
___Profit or Loss
Which of the above are your greatest concern and why?
What other concerns do you have?
Oh, by the way, are you having any fun? What do you enjoy most about your business?
What do you like the least?
By answering these questions you’ll have a pretty good idea of where you are. Have you identified some areas that need attention? Were you surprised about the personal questions at the end? Since you’re the most important element in your business, your personal state of mind is a critical element to success. Review your answers and summarize the current state of your business.
If you aren’t already doing so, I’d suggest you create a monthly spreadsheet that covers at least the financial elements listed above. It’s simple to do using any accounting software that allows you to create a one-year spread sheet. Set it up listing your financial elements along the left vertical axis and each month across the top of the horizontal axis. Then you can monitor and compare your numbers on a month-to-month basis, calculate percentages and see your cumulative income and expenses at the end of each month. Of course, you will add any other numbers that are meaningful to your business.
If you’re a relatively new business, your most important number is cash flow. You need to have enough monthly income to cover monthly expenses as they occur. Otherwise, you’re eating into your working capital. Meeting your expenses should be your primary objective. You’ll also want to know how many units (product or service) you need to sell at what gross profit margin to cover expenses. If your gross margin is 30% you need to sell and receive payment for $10,000 to cover $3,000 in expenses and profit.
Do you have months where you don’t cover expenses? Are you not selling enough units or not making a large enough margin on sales? Are accounts receivable backed up? Try to identify the primary problem and take action accordingly.
If you’re in a business that has a long lead time between sale and receipt of payment, you’ll need extra working capital to carry you through that time period. If you are on an accounts receivable system, be sure to bill on a timely basis and follow up so you don’t run into collection problems. This has been the downfall of many an extinct business.
Analyzing your business can seem a daunting task, but it’s a matter of learning to monitor the key elements on a regular basis using accurate data. Your assignment between now and the next article is to analyze your business. Put together the spread sheet using the specific elements for your business and monitor the results for a month. If you have questions as you work on your analysis, feel free to drop me an email or call 212-679-1209.
Next time we’ll look at what constitutes business fitness – that elusive place of stability and profitability every business owner seeks.