Straight on to this formula.
One of the questions I have been asked on a regular basis is, ‘Ben, how do I know whether my business is heading in the right direction or not? How healthy is my business?’ It’s not easy to tell... I do have a very simple formula that you can use, although it’s almost like an honesty formula, though. So you’re going to have to score yourself out of 10 in a couple areas of your business. You’re going to have to be brutally honest with yourself, otherwise you’re going to get a number that doesn't mean much at all.
How good is your cash flow?
Here’s the first thing... I want you to think about your cash flow. Are you struggling to pay your bills? Are you struggling to collect your money? Are there times where there’s not enough money in the bank? There’s a very famous quote or saying, I can't remember who said it, but they said, ‘If you've got more money at the end of the month than you have money at the end of the month, you’re in trouble.’
Hopefully that’s not happening to you in your business. So think about your cash flow. Then what I want you to do, I want you to work out a score out of 10, 10 being ‘my cash flow is really good,’ 0 or 1 being ‘my cash flow is really, really poor.’ Now you should be somewhere in the middle. But I would suggest that if you've got a lot of money outstanding, and you’re struggling to collect your money, and you’re always struggling to pay your bills because you haven’t got enough money in the bank, then you’d be somewhere around the 2 or the 3. If you’ve found you always have money in the bank and you’re paying all your bills on time, and you have surplus cash in your bank account, I would go somewhere between the 8 and the 10. That is what I would suggest.
So that’s the first number that you need...
How profitable is your business?
The second number we need is, ‘how profitable is my business?’ Every business has products and services that they offer, and hopefully you’re maximizing the profit of your business by focusing on selling higher margin products or services, which would maximize your profit. There are other things you can do also to maximize the profitability of your company like making sure your expenses are under control. But essentially, you want to get more sales than you need so that you can pay for all the expenses and have something left over at the end of the day.
I want you to do the same thing now. 1 being really poor, 10 being really fantastic, score your profits out of 10. So if you’re not making any profits, you’re at a loss, that would be a 0 (just in case you’re wondering). If you’re making profits and they’re on target to what you wanted… let’s say you wanted to make $10,000 a month in profit and you’re doing $10,000 a month in profit, I would score myself from an 8 to a 10. Of course if it’s higher than that then you’d be a 10.
Now you can take these two numbers, the number you scored out of 10 for cash flow and the number you scored out of 10 for profit, and multiply the two together. That will give you a number that will quickly indicate to you the health of your business. So let’s say you score a 4 for cash flow and a 5 for profits. 4 times 5 is 20, which means that you've still got a lot of room for improvement before you get to the 100. Let’s say you scored an 8 for cash flow and you scored yourself a 5 for profits. Well now that’s a score of 40. You still have a long way to go to get to the 100.
It's simple but effective
I know it’s a very simple formula, but it’s very effective just to get you thinking, ‘How is my business going? How healthy is my business, and what areas do I need to improve in.’ So if you've got great cash flow and poor profits, you’re still going to have a low score and vice versa. Great profits but no cash flow, you'll still get a low score. A healthy business needs both of those things to really, really thrive.
Hopefully that’s helped you work out how healthy your business is.
About the Author
Ben Fewtrell is a sought-after Business Coach, Keynote Speaker and trainer who has featured in Virgin’s Inflight Magazine and Entertainment Portal, SKY Business and “Secrets of Top Business Builders Exposed”. He is also the host of the popular Business Brain Food Podcast where he interviews leading experts on anything and everything business.