How do you know your business is healthy?

How’s your business doing?

It’s a simple question…at least on the surface, but one of the more challenging things about owning and running your own business is really getting a handle on how well you’re doing. And it’s really important to understand the current (and projected) health of your business. It’s where you spend most of your waking hours…it’s how you provide for your family (now and in the future) and you have employees and customers who count on you. Keeping score is the first step towards making your business better.

“If you can’t measure it, you can’t improve it.” – Peter Drucker

Finding a valid way to measure how you’re doing is important – but what makes it so difficult? For starters, most business owners can’t find the time to think about how they’re doing – they’re too busy putting out fires, chasing down customers and issues and herding cats to really dig into a big picture question like “How healthy is my business…really?”.

It’s a bit of a cliche, but if you’re working too much IN your business, then you can’t be working ON your business (making it better).

The other trap that business owners fall into when it comes to measuring success and health is that they look at the wrong things. The most obvious and easiest thing to track for a business is revenue. How much money was paid into the business this year vs. last year?  The thinking is that as long as that number goes up…or as long as you hit a preconceived target than you’re doing well.  The problem with revenue is that it’s often completely misleading.

Here’s a common example – I talked to the owner of a remodeling company recently and he shared that last year was by far his best year ever in terms of revenue – but he actually lost money for the year. His top line was great, but his bottom line was negative…and he wasn’t completely sure why. It’s clear that his business isn’t healthy despite the great revenue growth.

What about profits?

If revenue isn’t a great indicator of health, then what about profitability? It is called the bottom line for a reason – profits are what determine if you’re even in business or not. Profitability is definitely a component of your business’s health and you need to be tracking it, but it’s a lagging indicator and it doesn’t really tap into the underlying drivers of why you’re profitable and if you’ll be doing well in the future.

If profitability and revenue aren’t enough – what should you be looking at?

Consider taking a Value Builder Assessment

It turns out there’s an extremely powerful and well tested tool available to help business owners figure out how healthy their business is.  It’s called the Value Builder Assessment and it was created by John Warrilow, the author of the best selling books Built to Sell and The Automatic Customer.

Based on extensive research and his own past experiences with building and selling successful businesses, John has created the Value Builder Assessment to help business owners understand the 8 fundamental drivers that impact the value…and the health of their business over time. Obviously this information is great if you’re considering selling your business but it’s actually also great if you’re not planning on selling.  The same fundamentals that drive value to your business, also make it a better business to own and operate.  It’s kind of like the HGTV show Love It or List It – where a homeowner ends up fixing the challenges with their house and decides that they would prefer to stay instead of sell.

The 8 Value Builder Drivers

So what are the fundamentals for a healthy business?  The Value Builder assessment covers 8 Drivers. They’re all important individually, but the combination of them, the overall score really paints a complete picture of your business. Here’s a quick summary of the 8 Drivers:

The Switzerland Structure – Like Switzerland, it’s important for a business to be independent if you want to be successful. How much do you rely on any one customer, employee or supplier?

Financial Performance – As we talked about above, revenue and profitability are both important…but it’s just one component. In general, your business is healthier if it’s larger (more revenue) and more profitable…and if you have structured (probably outsourced) support for your bookkeeping.

Growth Potential – Are you at the end of your growth curve or could you easily expand with new products, new markets or in some other way?

The Valuation Teeter Totter – The more cash your company needs to operate, the less healthy it is. It’s popular to say cash is king, but it’s also true. Can you improve your cash flow situation? Is it holding you back?

Recurring Revenue – One of the biggest drivers of long term health is generating revenue that repeats on a regular basis (think subscriptions, renewals, etc.). Not only is it healthier, but it makes your business much easier to run.

Monopoly Control – Monopolies tend to have a bad reputation, but the closer your business can come to being one in your market, the healthier you are (lower risk, higher profits, more control).

The Customer Score – How much do your customers like you? Do they love you? Are they Promoters or Detractors? The more loyal and engaged your customers are, the healthier your business is.

Hub and Spoke – As the owner, how involved are you with the day to day operations of your business? Can you take a lengthy vacation? Do all of your customers know you on a first name basis?  The less involved you are with the day to day of your business, the better.

Interested in learning more – or learning what your Value Builder Score might be?  Here’s the link for more information on Value Builder with Aspire.

What do you think? How do you think about the health of your business? Can you quantify it? We’d love to hear your thoughts – leave us a comment below.

Shawn Kinkade   Kansas City Business Coach