Do You Know How Your Business is Doing?
Take These Tests!

By Isabel M. Isidro, Power HomeBiz Guides

Every entrepreneur wants his or her business to be successful. But what is success, and how will you know if you are successful?

As you spend your energy, time, resources and talent building your business, there will be moments when you question yourself. You start to ask if everything has been worth it - and that's good! You may feel that despite your seemingly best efforts, your business is not moving as fast as you hoped it would be. Your business is now six months old, yet you are still putting in 15 hours everyday. On the other hand, you may have gotten some financing from your family, but still unsure whether your business will qualify for a bank loan. You have bought a couple of PCs, yet you are unsure whether your cash flow would permit you to buy that ultra-thin laptop you saw on television. How do you know that your business is indeed making headway? What will make you stop and recognize that your business is a success?

As a founder, you have to always question yourself and the value of the ideas that you have. All new business owners face the question "How am I doing?" It is thus crucial that self-assessment and benchmarking be part of your start-up process. You need to know what and how you are performing, in order to know how to move on. Feedback and realistic self-appraisals using various tools will help you build a stronger business and maintain your positive attitude towards your business.

There are several tests you can do to find out how your business is doing. Remember, however that if your business is new, you need to go easy on yourself. The standards for those in business for less than a year are different for those who have been in business for several years.

Self-Assessment

It is best that you perform a self-assessment of your business every three months. Measure your performance against your personal and business goals.

Bring out your business plan, and review how far you have gone vis-�-vis the goals that you want to achieve. Have you launched your product as scheduled? Were you able to get the financing that you planned? Using available data, analyze the trends and compare your business with other businesses similar to yours. This is called benchmarking. Determine some common factors that affect your industry, and then determine how well you are doing based on that factor relative to your industry as a whole, or against your competitor. If you are online business, for example, how many unique visitors are you getting compared to your nearest competitor?

Bill-paying test

Are you covering all business expenses, or are you having a difficult time making the ends meet? You can pat yourself on the back if you are able to cover all your expenses in the first year, as you are definitely much better off than most first-year businesses. Do not expect, though, that your income for your first six months of operation will allow you that much-coveted Jaguar sports car (unless you are really, really lucky). By the time you have been in business for a few years, your self-employment income should cover a comfortable lifestyle, vacations, nights out, insurance premiums, and a retirement plan.

The job test

The investment test

The investment tests let you know how well your business is using your money. Assume the position of an outside investor: would you invest in your company or would you be better off investing in it or in another investment option (stocks, bonds, etc.)?

The first step is to determine the amount of money that you spent to set yourself up in business. Based on this figure, calculate your profit (if any) during your first year. If you did not draw a salary, as some entrepreneurs do in their start-up phase, subtract what your salary would have been from the amount of money left at the end of the year, after expenses. If you are a sole proprietor and your profit is commingled with your salary, go back to the job test to figure out what portion of your earnings is a comparable salary and what part is profit.

Divide your profit by the money you spent to set up the business. Your return should be equal to or greater than the prevailing interest rate or average investment rate. If it is less than the prevailing rates, you might want to consider putting your money in an alternative investment and finding a job.

The numbers test

Financial numbers serve as objective indicators of how well your business is doing. Through simple financial ratio analysis, you can gauge the financial strengths and weaknesses in the operation of your business. Knowing how you stand financially allows you to manage your financial situation and take appropriate action when necessary. In addition, you can better evaluate the competitive performance of your company in relation to similar businesses in your industry.

There are several rules of thumb for recognizing a healthy business. The first is through the current ratio, which is the ratio of your current assets to current liabilities. Generally, a ratio of current assets to liabilities that is at least 2 to 1 is good. To improve your current ratio, you can either increase your capital through equity or debt financing; or decrease your liabilities by paying off some of your debts.

Another indicator is the acid test or quick ratio test. The quick ratio is calculated by dividing total assets (Including cash on hand, plus government securities and receivables) by current liabilities. This ratio is a measure of liquidity, particularly where your business will be if there is a crisis. A quick ratio of 2.0 or better is considered acceptable.

The debt-to-equity ratio compares the total debt of your business with its net worth. Total debt is divided by net worth. Although debt adds risk, a debt-free business may not be able to grow fast enough. The whole reason for using debt is to help grow the business and increase the owners' return on capital. A debt-to equity relationship that is lower than 1 is considered good for a business.

There are other financial ratio analyses that will be of great help to you in managing your financial situation. Remember, though, that while financial analyses can illuminate you about your business; it cannot tell you everything about your financial performance. The sales test

Determine how your sales are growing. Compare your sales and profit with last year's levels. Is your sales moving in the right direction? Is your sales moving with the industry average? You can pat yourself in the back if your sales are growing much faster than the industry; but you need a thorough reexamination of your sales strategy if your sales fall below the average. Worse, if your sales are declining while the whole industry is growing! Re-evaluate your sales strategy; examine your incentive structure if you have sales personnel.

Growth company investors like to see sales and earnings growing at 15 percent or more a year. Is your business approaching or exceeding the 15 percent standard? At the very least, you should be keeping up with the inflation rate.

The comparison test

Comparisons are among the most accurate measures of success. However, you need to identify some sort of target, or a measure of best practice performance, with which to compare yourself. This is benchmarking - a process that gives you the external references and the best practices on which to base your evaluations and to design your work processes. Benchmarking will provide you with the answer to the questions:

- How does your business compare with the business and operational trends in your industry? - Where does your business fit in the rankings? - Are you in the upper 25 percent? - Are you making progress fast enough? - Are you using the best practices?

The profit test

Let's face, making money is what being in business is about. If your company is not profitable, then there is no reason to put yourself through the pressure, headache and long hours that a business demands. You might be better off employed by someone else and secure in the knowledge of a regular and steady paycheck, free time and 8-hours workdays.

For the profit test, you need to determine the following:

- How much money you are making - Whether you are utilizing your present resources to maximize the profit potential of your business - Whether you are losing money or just breaking even

Start by breaking down your sales by individual product and service categories. Which among your product categories make you the most money, and how much of your time do you spend on these categories? Who are your most profitable clients and who are not? Review the data to determine if you're focusing your attention in the right sales areas. Are you putting more marketing energy into one service or product than is justified by its profits? Or are you giving more attention to marginally profitable clients?

Take heed: many businesses that show a loss, or minimal profit the first year will show great improvement during the second and third year as the business matures.

The inside test

Some entrepreneurs choose to start their own business, not much for financial considerations, but to spend more time with the family or enjoy the freedom of working their own hours? Another important test is to determine how well you are meeting your personal goals. You need to determine how you define success for yourself in terms of income, liquidity, free time, and the quality of life.

Ask yourself how it all feels inside. If your business is growing, with new clients, it is moving in the right direction, and you feel comfortable, then you are a success. In the final analysis, you have to feel good about what you're doing.

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Copyright 2000. PowerHomeBiz.com, LLC. Article written by Isabel M. Isidro, Power HomeBiz Guides. For more articles, visit Power HomeBiz Guides at http://www.powerhomebiz.com. PowerHomeBiz.com is an online magazine designed to stimulate your entrepreneurial mind. We make small business do BIG business. To subscribe to the bi-monthly newsletter, send email to [email protected].

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