Small businesses—like the people who own and operate them—need an annual checkup to stay healthy and on track. If you haven’t performed one lately, now is a good time to begin.
Step One: Assessing your current situation and immediate business needs
The first step in any financial checkup is evaluating where you are. Is your income in line with your projections? How about your expenses? What about cash flow? How does your inventory compare with previous years?
Now is also the time to look at your upcoming needs and plan equipment purchases and other capital expenditures that may be needed in the coming months. Thanks to the economic stimulus bill, you may be able to substantially reduce your business’ 2008 federal taxable income if any purchases are placed into service during 2008. Your tax advisor can tell you more.
If high energy costs are significantly impacting your bottom line, you may decide it’s time to switch to a vehicle that gets better gas mileage, or install energy-conserving upgrades to your heating and cooling system.
This is also a good time to assess any changes that have taken place in your personal circumstances. Perhaps you have a new college graduate interested in entering your business or a competitor has made overtures to you regarding a buyout. Depending on your circumstances, it may be necessary to rethink your budget, investments and other financial matters.
Step Two: Identifying your goals
The next step in any financial checkup is an evaluation of your financial goals. Ask yourself where you want to be in five years. What about 10? Do you want to grow your business, increase profitability? Or would you like to sell your business or transition it to a son or daughter’s management by then? When do you expect to retire? Is your business on track to deliver the returns you need to make all that possible? If so, great. If not, can you figure out what you’ll need to do to get there?
Not sure where to begin? Then make an appointment with your accountant, banker or other financial professional. They can help you assess your financial strengths and weaknesses and may have ideas for improving your cash flow or restructuring your company’s debt if you are behind on payments.
The important thing is to get your goals and other financial information down in writing, so you have hard numbers you can compare from year to year as you measure your progress.
Step Three: Evaluating threats
You may have spent years building a successful business. There are things you should be doing to protect that investment.
An important step in any financial review, therefore, is a risk assessment. Threats can come from internal and external sources. You can’t prevent new competitors or changes in the economy. But you can control how your company reacts and adapts to these changes.
Your biggest threat could be the loss of a key employee or the death of an owner. It could be fire, employee theft or any of countless other natural and manmade disasters.
The important thing is that you understand your risks—they may change as the years go by—and take steps to guard against them. That includes a review of your accounting procedures, banking tools and insurance coverage—business, health, disability and auto—every year. Likewise, you should make an annual review of your will and estate plan to make sure they are up to date. A small business financial checkup should also include free credit bureau checks along with an evaluation of your debts. If your debt load has increased, it might be time to re-evaluate your spending.
Step Four: Considering opportunities
Now is also a great time to think about new opportunities that might be on the horizon. Has a vendor approached you about an interesting joint venture? Have you been tinkering with the idea of a new product or service? How might these opportunities fit into your larger financial picture? These are all questions you should consider at least once a year.
Similarly, do you have “hidden dollars” in your business that you are not capturing? Maybe you’re in a strong cash position and wonder if it’s better to save or invest it, or use it to pay off debt or purchase new equipment.
An analysis of opportunities can also include a total tax checkup, and the fall is a perfect time of year to complete it, giving you ample time to make changes that may benefit your bottom line.
You will want to review your own investments to see if they are performing at the level needed to achieve your long-term financial goals and consider selling those that may be impeding you from doing so. Are you investing enough in your retirement account—and taking maximum advantage of the tax-reducing strategies? If not, it’s time to consult with your financial planner or banker to explore your options.
Step Five: Remembering your personal and family goals
The highest-grossing small business in the world isn’t a success if it causes stress or doesn’t create the profits necessary to meet your family’s financial needs. That’s why the last, and perhaps most important, step of any financial checkup is to remember your personal and family goals.
By meeting your identified business goals, are you achieving your definition of the good life? If so, congratulations! That in itself speaks to your success as a business owner. If not, now is the time to think about where changes might be needed.
No small business is perfect. But a good plan and frequent checkups can help you keep your business strong and healthy—and headed where you want it to go. iBi