The winners of the business world are obviously doing something right! There are certain key things that all of these healthy, successful businesses have in common, regardless of their size or the industry they’re in. We’ve identified 5 key areas that are paramount for business success.
They have healthy cashflow
Did you know that poor cash flow is the leading cause of business failure in Australia?
If you struggle to pay your business expenses on time, this is a tell-tale sign that you have cash flow issues.
You can improve your cash flow by:
- increasing your revenue,
- decreasing your expenses,
- delaying the timing of your expenses, or
- a combination of all three.
Increasing your revenue
There are several ways you can increase your revenue, including:
- service more customers,
- upselling or offering additional goods or services on top of base transactions,
- increase the frequency of customer transactions,
- increase your prices.
Decreasing your business expenses
Decreasing your expenses will also help to improve your cash flow and overall profitability. Regularly review all of your business expenses. Try and eliminate or at least minimise any non-essential expenses if you’re having cash flow issues.
Delaying your business expenses
Delaying your essential business expenses if you can is another way of helping your cash flow. For example, by negotiating extended payment terms with your suppliers that better suit your business’ cash flow.
They are highly liquid
Healthy businesses tend to be highly liquid. This means they don’t have too much of their cash tied up in assets that don’t generate much (or any) revenue — they have plenty of assets that could be quickly and easily turned into cash if they needed. For example, the most highly liquid asset is cash on hand, because it’s ready to go! Inventory is fairly liquid because it can be sold to turn it into cash.
An example of an illiquid asset is property. If you’ve put all of your money into property, there’s no way you can quickly and easily convert it to cash — it would require the sale or refinancing of the property.
To measure your liquidity, use the current ratio. This is calculated by dividing the value of short-term assets (things like cash on hand, receivables or assets you expect to turn into cash within 12 months) by short-term liabilities (any loans, debts or obligations that you’ll need to repay within 12 months). It gives you an idea of whether you will have enough cash to pay your obligations, or whether you need to work on improving your cash flow and finding way to release cash from assets.
In general, any ratio higher than 1 is good. 1.5 to 2 is considered ideal, but this depends on your business liquidity needs. A ratio above 1 means the business has enough liquid assets (or cash) to repay liabilities while effectively using its capital.
For example, your business has $200,000 of current assets made up of cash, receivables, and inventory. The current liabilities also have a value of $200,000. This is a current ratio of 1 and means your business has exactly enough current assets to repay its current liabilities.
A ratio below 1 means that your business may have tied up too much working capital and will likely face cash flow issues over the next 12 months. To free up working capital and improve cash flow, a business line of credit can help. That way, you have a line of credit available for those times where your business is low on cash.
They set goals and monitor performance
There’s an old saying that ‘businesses don’t plan to fail, they fail to plan’. Healthy businesses set short (less than 12 months), medium (2 – 5 years), and long-term goals (greater than 5 years).
Healthy businesses set SMART goals. SMART is an acronym for Specific, Measurable, Achievable, Relevant and Time-bound (in other words, they have a deadline).
They then develop plans to achieve those goals and they regularly review their progress towards achieving them. If they find they are falling short, they take corrective action as soon as possible.
They attract the “right” customers
The ‘right’ customers have three main characteristics. They:
- are profitable for the company to serve.
- pay upfront or on time.
- buy regularly or in sufficient quantities.
Healthy businesses have a good supply of the right customers. They aren’t overly dependent on a few large customers.
To attract your ideal customers, you first need to have a clear understanding of who they are and what they need. Once you understand their pain points and how they behave, you can prepare your marketing strategies to specifically target this audience.
They operate efficiently
Healthy businesses have the operational efficiency to drive revenue and profit. They can scale up to cope with increased demand. The associated revenue and profit in turn can be used to establish a solid financial footing to keep growing the business.
It’s also important to pay attention to revenue generating expenses vs discretionary expenses. Discretionary expenses are payments that the business does not make a return on — once they’re paid out, they’re gone. Revenue generating expenses are paid out for things that will see a return. For example, inventory and staff wages can be revenue generating expenses because they are directly used to generate sales.
A solid business plan can help you achieve this. Experiencing business growth without a solid plan or strategy to scale can have devastating impacts for your business. You could find yourself cutting corners to keep up with demand, ruin relationships and end up with a bad reputation.
If your business knuckles down and focuses on improving each of these 5 key areas, we have no doubt that you’ll soon be up there with the healthiest businesses around!