How to Determine Financial Stability
Is Your Company Financially Sound?
Step 1. Review your production and overhead expenses and determine their costs per unit. Determine your profit margin per unit at your current sales levels.
Calculate your profit margins based on lower sales levels to determine at what sale volume level you will no longer be profitable.
Step 2. Create a cash flow budget that shows exactly when your income will arrive and when payments are due. Creating a budget that uses monthly averages for expenses such as insurance premiums and sales doesn’t prepare you for times when you’ll need extra cash to pay bills. Analyze your cash flow budget to determine if you will need to decrease spending in certain months or obtain a loan or credit line to pay bills during certain months. Discuss whether or not you need to strengthen your accounts receivable monitoring and collection processes.
Step 3. Review your customer list, ranking customers by sales volume. Calculate the effect of losing each customer, and two customers at once, on your ability to stay in business. Re-calculate your production and overhead costs per unit based on specific customer losses to determine if you will make a profit at these sales levels. Create a plan to reduce your dependency on one or two accounts if you can’t survive without them.
Step 4. Re-do your annual budget based on different sales levels to determine your ability to withstand a decrease in sales. Re-calculate your production and overhead costs per unit based on these sales levels to determine if you will make a profit. Create budgets that automatically trigger spending changes when your sales decrease.
Step 5. Discuss the effects of losses of key employees. Determine the costs to bring a replacement on board for each key employee and the loss of productivity or sales a departure will have on your company. Have a detailed written job description for each key employee and ask each to prepare an operating manual for his department or function for use by his replacement.
Step 6. Examine your lines of credit and determine the effect on your business if you lose one or more lender. Discuss whether you can quickly replace that credit line and the effects on your business of losing key sources of credit for 30, 60 or 90 days or longer. Create a plan for operating without credit to determine how long you can do so.
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Patty Block, President and Founder of The Block Group, established her company to advocate for women-owned businesses, helping them position their companies for strategic growth. Charting the course for impactful, sustainable, profitable businesses, the beacon is control: of your strategic direction, your money, your time, your staffing, and your ability to bring in business. The Block Group brings together the people, resources and ideas that build results.
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