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3 Must-do Small Business Health Checkups

By: Lynn Ruthe

 

business man using stethoscope checking dollar ststus , business concept

Just as you need routine checkups to maintain your health, you should frequently assess the vital signs of your small business. 

A healthy business has the ability to pay its bills, meet customer demands, and scale sustainably. Scoring well on these metrics buffers your business against volatility in your market or the wider economy

You can conduct the following assessments to measure the health of your business. 

The Financial Check-up

Most business owners know their revenue and sales numbers off the top of their heads. However, these figures alone do not give you a complete picture of your business’s financial health. By plugging the numbers you already know into different formulas, you can determine if your business is thriving or simply chugging along.

First, measure your business’ solvency. In simple terms, solvency measures your company’s ability to pay its debts. One useful benchmark for determining your solvency is the debt-to-equity (D/E) ratio.  A D/E ratio under 1 indicates that a business can pay its bills, even if revenue decreases.  

You can calculate the D/E of a small business by dividing your total liabilities by your business assets. Let’s say your business owes $15,000 to its suppliers and has $60,000 in reserves. This would give you a very healthy D/E ratio of .25.  

Your profit margin is another important indicator of your business’s health. This formula compares the costs and earnings of each sale. Knowing this number will help you understand how much of your revenue is staying in your pocket.

There are many ways to calculate profit margins, but the most comprehensive considers all of your costs of doing business. In this case, you subtract your net income from your total operating expenses, plus the cost of producing your goods or services.  Then, you divide this number by your income and multiply the result by 100. 

Here is an example:

  • Net income: $120,000 – Total expenses: $85,000 = $35,000
  • Divide by income: $35,000/ $120,000 = .2916
  • Multiply by 100: 29.16
  • Net profit margin: 29.16%

While average profit margins vary by industry,  higher percentages reflect a healthier business. 

If you want to improve your D/E or net profit margin, find ways to eliminate or reduce operating costs. 

The Competition Check-up

There are more than 30 million registered small businesses in the United States. Likely, some of those companies are your direct competition. If you want to stand out in a crowded market, you have to understand your competitors’ strengths and weaknesses.

Completing a competitor analysis will help you identify market gaps that you can leverage to grow your business. After making a list of your main competitors, review their services, branding, price points, and business model.  Also, look into what their customers and target market are saying about them. You can find reviews on social media or online forums. 

It is also increasingly important for small businesses to commit to inclusive models and diversify their workforce. In 2020, nearly 70% of customers reported that a company’s diversity and inclusion efforts influenced their buying decisions. 

If you would like to start on a diversity and inclusion plan, you can follow McKinsey’s 5A approach:

  • Aspire – Make concrete DEI goals and share them with your customers
  • Assess – Measure your company’s current DEI efforts and the diversity competencies of you and your staff. 
  • Architect – Create a plan to achieve your DEI goals. Get input from people from diverse communities and experiences. 
  • Act – Engage in short, mid, and long-term actions that will make a measurable impact.
  • Advance – Evaluate your results and scale successful initiatives. 

The Customer Satisfaction Check-up

Happy customers are the life’s blood of any small business. Repeat sales and word-of-mouth recommendations are some of the biggest drivers of revenue and growth. While you can estimate satisfaction based on returns and cancellations, you should also solicit feedback directly from your customers. 

Email surveys are one of the easiest ways to gauge customer experience. You can set up your sales system to automatically email surveys to customers after they’ve completed their transactions or received your services. Depending on the scale you use, you can calculate different customer satisfaction scores.

The Net Promoter Score (NPS) uses a 1-10 scale to measure satisfaction. People who rank your services as 9 or above are promoters, while those who rank you below a 7 are detractors. 

You can calculate your NPS by subtracting the percentage of promoters from the percentage of detractors. A high NPS means customers are generally satisfied with your business and are likely to recommend your company to others. 

However, you will need to supplement the NPS with qualitative feedback. You can collect this with open-ended survey questions, or ask customers for testimonials. To encourage more customers to participate, offer an incentive like a coupon or free gift. 

Published: August 24, 2022
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