You wouldn’t drive your car month after month without getting it serviced because you know, for it to continue running at peak efficiency, it has to have its regular checkup. Even if it’s running smoothly, you’d still have it serviced because you know you’d have a big repair bill if you didn’t.
Why not do the same for your business?
Your business may be humming along with a healthy profit margin and ever-increasing revenue, which may tempt you to assume everything is fine. Don’t fall into this trap. Business may be good today, but if you don’t routinely examine your business — along with the market and the economy — it may not be doing so well tomorrow.
Don’t let years pass without opening your books and delving into the numbers. Schedule a business checkup every three months, and use an unbiased, outsider’s point of view for the examination. The process works even better if you get a second opinion.
I recommend performing a SWOT analysis, which is a tool that helps you identify your business’s strengths and weaknesses and shows opportunities for growth and threats to your market share. Lin Grensing-Pophal, author of “The Complete Idiot’s Guide to Strategic Planning,” is a SWOT proponent who has said, “If done effectively, SWOT can help drive better strategy development.”
SWOT stands for:
Here are a few questions you can ask when evaluating your business’s strengths:
What does my business do well?
What does my business do better than the competition?
What experience does my team have? Specialized knowledge? Unique skills?
Where is my business most profitable?
What areas of my business need improvement?
What parts of my business are not profitable?
What resources does my business lack?
Where does my team need more education? Experience?
Are there new target audiences I can reach?
Are there related products or services that provide an opportunity for my business?
How can technology enhance my business?
How can my business do more for my customers or clients?
What are my business goals?
What are my competitors’ strengths?
What are my competitors doing that I’m not?
What obstacles does my business face?
What is going on in the market?
What is going on in the economy?
Using a SWOT analysis is an excellent strategic tool, but it’s only effective if you answer the questions honestly and conduct the analysis consistently. You can also perform a SWOT analysis if you’re considering adding a product or service or if you’re considering expanding.
Numbers don’t lie
In addition to using SWOT analysis, I recommend you calculate financial ratios because they tell you what financial shape your business is in. There are lots of ratios that provide valuable insight, so use as many as you deem necessary, but I’ve found these three to be the most useful:
Current ratio is current assets divided by current liabilities. This ratio, which should be calculated at least once per month, indicates how much you have in cash — or will turn into cash in the next 12 months — for every dollar you have coming due in the next 12 months.
Debt to equity
Debt to equity is total liabilities divided by shareholder equity. This ratio indicates how well capitalized your company is. If the ratio is high, your business is too dependent on future profits to pay off its debt, and if it’s low, your business is operating off profits you’ve already earned.
Return on assets
Return on assets is net income divided by total assets. This ratio indicates how efficiently you’re converting your investments (equipment, real estate, and other assets) into revenue.
FLITER, an innovative grading system, calculates how your business is performing in a range of areas — customer service, distribution, finance, income generation, inventory, management, marketing, operations, personnel, procurement, production, technology — and assigns a grade for each area.
Combining FLITER with a SWOT analysis will give your business a comprehensive, in-depth examination, and it will reveal exactly how healthy your business is.
Make it a priority to give your business a quarterly checkup to ensure it’s operating at peak efficiency and effectiveness. I assure you: As important as routine checkups are, few — if any — of your competitors are taking time to perform them.
Read the Kansas City Star post: http://www.kansascity.com/news/business/biz-columns-blogs/talking-business/article39040197.html#storylink=cpy