The health of our business financially is important, even if you are a Christian. I am not saying that money should drive the business, however, as good stewards managing the finances, it is important to keep your employees paid, vendors paid, and the business thriving.
What does a healthy business look like though?
When we start our own business we are conservative about our own salaries and our spending. We just don’t have the cash flow. However, I have seen a bad trend when a business starts to grow, in both spending and decision-making, which are correlated.
Here are examples:
- If you increase your personal salary so you make less profit this year than last, it doesn’t mean that the health of your business is worse.
- If you decide to invest in some things that are nice to have for your business as they are tax deductible, then that is a decision you are making. It doesn’t mean the health of your business is at stake.
- And to some extent, if you are investing in business growth, those expenses may reduce your current year profits. That doesn’t mean your business isn’t healthy, though. Sometimes you have to be able to separate investment spending from current operations.
Measure Your Core Business Financial Health
It is important to be able to measure your foundational business health aside from these decisions to spend extra money that are outside of normal operations.
Many times these are wise decisions. Investing in growth or even taking a realistic salary for yourself are legitimate business expenses. I just know that as a small business owner, when we see a lower profit than prior year, we get nervous.
If we don’t understand the why of the lower profit, we can go into scarcity mode and start cutting necessary expenses to maintain a healthy business. Then things start to turn in to the proverbial self-fulfilling prophecy.
If you are not a financial analyst, I understand…let’s just do a little back of the envelope analysis. I will give you an example from my own business.
A Little Financial Analysis Goes A Long Way
We expanded our offices at the end of last year. This required some demolition, paint, and floors. And, even though I tried hard to get it all fully complete and paid for last year, approximately $11,000 hit in the first quarter of 2017. When I compare the profit from first quarter 2017 to first quarter 2016, I add back the $11,000 so I can compare apples to apples.
Since there was no renovation cost in first quarter 2016, I want to compare 2017 without the renovation cost.
If my adjusted profit is still the same or better than 2016, I am doing fine.
I do understand you are still spending that extra money. And you may have to save before you make those expenditures to ensure that you are investing wisely.
But either way, if your base business is still healthy, you don’t want to start hurting it by cutting needing resources. It may impair the base business’ ability to continue providing healthy cash flow.
Financial Training Should Be a Priority For All Business Owners
I know if you are not a numbers person, this may not seem completely clear. However, this is an important area for all small business owners to continue increasing their knowledge.
Invest in a class on financial management for non-financial managers, call and discuss with your CPA, and/or maybe get a business coach that can help you determine the financial health of your business and assist you in making wise investments for future growth.