Sustaining a profitable business can be a challenge. With statistics showing that over 70 percent of businesses close down within 10 years, it’s easy to feel that the odds can be against you. If you’ve already lasted longer than this, then congratulations!
It’s no time to be complacent, however. Even a successful business can take a turn for the worse. Sometimes, the warning signs aren’t immediately apparent to the owner. Here are three key areas to watch:
1. Profit. Of course, profitability is the ultimate measure of how you are doing, and any decline is important to take note of. You need to ensure you are growing at least at the rate of inflation to continue to provide yourself with the reinvestment funds and lifestyle you currently have.
2. Cash flow. Even more important than profit, however, is cash flow. Many a profitable business has become undone because they have been unable to match the inflow of their cash to what they must pay out. In fact, failing to manage cash flow effectively is the number one cause of business failure. According to Business Insider, 82 percent of small businesses in the U.S. fail due to cash flow issues. Cash flow problems can be a hidden symptom, as many owners mistakenly believe that as long as they are “making money,” everything will be alright.
3. Debt. One of the most obvious signs of cash flow issues (and one of the biggest contributors to cash flow decline) is the size and the level of debt. Firstly, if the debt is high relative to the assets of the business, then even a relatively profitable business will have a large portion of their profits and cash flow being siphoned off to debt repayment and servicing. You can have the fastest car in the world, but if you face a strong enough headwind, you’ll struggle to get underway. The second issue is the change in your debt. If you find your long-term debt or your level of creditors are increasing on a monthly basis, this is a problem that will cause you further headaches down the track.
How has your store profit trended over the last three years? Has the level of your creditors been increasing? What is the level of your overdraft and how does this compare with the last few years? Seasonal fluctuations in cash flow are normal, especially in the lead up to the holiday season and the period immediately afterwards, but you should compare how this trend is relative to previous years.
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