Beyond the Balance Sheet: Assess Your Business’s Financial Health

  • Growth strategies
  • 3/19/2021
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Key insights

  • Take the time to level set organizational priorities and expectations.
  • Do your best to quantify the key drivers in your business: leadership, execution, and sales.
  • Timing is the biggest factor in navigating major business transitions.
  • Proceed as if your business is always for sale.

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Can you keep the lights on? That was the question on the minds of many business owners in 2020. COVID-19 presented organizations with circumstances far beyond cash flow and economic concerns, surpassing even the most aggressive contingency plan. Businesses with strong financial health survived, and today, may even be ready to thrive.

Whether you’re pursuing a new opportunity or responding to a crisis, financial resilience provides a healthy foundation for an always uncertain future. With a solid vision and goals, a clear view of your organization’s value, and a plan to address risk, your business can be prepared for anything.

With the economy slowly reopening, it’s a critical time to level set organizational expectations. Review several key points as you assess your business’s financial health and prepare for the future.

Understand your personal goals and connection to the future of your business

Throughout your business’s journey, take a step back and evaluate its trajectory — can your business continue to grow and drive profitability? Will the business be able to help the owners reach their goals? After all, the ultimate goal of a business is to generate a return on investment for its owners. To start, look at your personal and organizational financial health through the same lens, since the two are often intertwined.

If there’s an opportunity to grow and scale the business, first determine where the investment will come from and your personal readiness as a business owner to see it through. Retained earnings, capital contributions from owners, equity offerings, and loans can all be viable sources of investment, each with their time and place as personal and industry-wide circumstances allow.

As you consider the future, be honest with yourself about your priorities as an owner and how that connects to decisions made within your business and in your personal life. Understand your personal end goal to help clarify your assessment of personal and organizational financial health and determine next steps for you and your business.  

Assess the value of your business

Business is about results. Assess your organizational value to understand how you’re doing and what the future could hold. Always prepare your business as if it were for sale. If you build a healthy business with enough flexibility, you’ll always have options. After all, freedom is what owning a business is all about.

Consider a concept known as the value triangle

This three-pronged approach focuses on three factors that drive financial results: execution, growth, and leadership. Ask yourself specific questions as you consider each.

  • Execution — How does your business make money? Is it operating efficiently? What processes and systems can be improved? What is the cost structure you need now and in the future to reach your goals? Are you making the most of opportunities? How are you managing risk?
  • Growth — Is there demand for your product or service? Can you develop and maintain customer relationships to capitalize on that demand? Can you grow sustainably and diversify risk within your customer base?
  • Leadership — Do you have the right vision and the right team to put it into practice? What skills does the team need? Does the organizational culture support your goals and values? Is there a leadership succession plan?

As a business owner, review data as you answer these questions. Hard numbers reveal insights we can’t otherwise glean from simple observation. Each of these arms of a business deserves its own set of key performance indicators.

Value is much more than what is shown in your financial results

There is also intangible value in a business (such as strength of systems and processes, organizational culture, leadership bench strength, and customer mix), and focusing on these factors allows you to strengthen the value of your business.

The good news is much of it can be measured. A financial statement tells a story, but so do customer surveys, employee satisfaction assessments, recruiting trends, and efficiency scores. Monitor these data points to help determine trends that affect your business’s bottom line and make necessary adjustments.

If you lack visibility, conduct a comprehensive review of the entire triangle and quantify unknowns using custom dashboards and data analytics. An in-depth look at your people, processes, and technology often yields surprising takeaways and action items to help you understand the current state of your business.

With your own valuation grounded in reality, and a clear understanding of your baseline value, you can begin to build your roadmap to strengthen financial health.

Consider the risks and prepare for what’s next

Every business owner operates with some degree of risk. Sometimes, circumstances such as COVID-19 present acute risks. In other cases, risk is systemic, such as poor leadership or cost overruns.

While identifying and monitoring risks for the business owner and organization do not always improve financial results, it should be one of the first areas of focus as you assess your business’s health. Mitigate unnecessary risk to help protect yourself, your family, and your business, along with any value generated in the future. Start with areas that need to be addressed sooner rather than later, such as estate and ownership matters, legal, regulatory, insurance, tax, and cybersecurity considerations.

Often, a business is most vulnerable when it is in the midst of a transition, whether it’s landing a large client, gearing up for a new product line, or transitioning to the next generation of leaders. In these instances, it is critical to have a strong leadership team and a well-thought-out plan in place to navigate these transitions.

Consider outside input in these critical moments

Through an organizational assessment, you can work with professionals to connect the dots, identify needs, review leadership and talent gaps, and design financial models and plans for the road ahead. Together, this process culminates with actionable steps for maintaining financial health.

Owning a business is always a personal journey. Stay proactive as you prepare your organization for the future.

How we can help

At CLA, we promise to know you and help you. Our professionals take a holistic approach to understand your personal and organizational goals so we can help you develop a plan. To address your pain points, we bring integrated insight and services to help you solve your broader business challenges.

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