While it’s critical to assess the financial health of a small business before you buy, there are still important decisions you need to make after the purchase. Here are three factors you must look at to ensure the long-term health of your new small business venture. These decisions are especially important if you purchased a small business in financial trouble, but even if the business is healthy, they are still major factors in its continued success.
The ability of your small business to generate revenue might have been one of the reasons you purchased the business, but it might not continue if you haven’t properly planned and if you don’t continue to focus. Inventory management, sales forecasts, purchase orders from suppliers, and point-of-sale processes all need to work in concert for your small business to successfully serve and supply customers.
Overhead & Expenses
Overhead is the cost of running the business. A useful way of looking at overhead is to calculate the percentage of overhead expenses to sales. Look at the financial records for the business for the past 12 to 36 months. A spike in expenses means the cost of overhead stayed the same, while the sales levels (revenue) dropped. If it happens in a predictable pattern, the business may be taking on too much risk at the current level of overhead. Recognize these patterns and prepare for the downturns in advance. For example, if the business gets very few customers after certain hours during the winter, you can reduce payroll costs and come out ahead by closing earlier during the slower months. Many of the small businesses that did not survive the latest financial crisis can look to the owners’ failure to reduce overhead expenses when sales levels dropped.
How long your business can weather a financial crisis is a measure of solvency. At its basic level, solvency is how long current assets exceed current liabilities. If all of the customers suddenly stopped paying and income dropped to $0, how long could your new business stay afloat? As a new small business owner, you should remember to take all of your expenses into account. Businesses can have quarterly and annual expenses in addition to the usual monthly expenses, so make sure you consider those as well.
These factors are not the only ones you should manage, but they are critical. Properly understanding their impact can make the difference between a healthy, thriving small business that is an asset to your financial portfolio and losing your investment.
Cougar Mountain Software’s Denali is a small business software solution that contains the tools you need to manage, report, and analyze these small business accounting success factors. The Financial and Sales Dashboards are essential small business accounting software features that allow business owners to quickly analyze their accounting data and make better decisions.