If you ever go to the hospital or even for a check-up at the doctor’s office, one of the first things the nurses do is check your vital signs. These are the critical factors that are used to determine the state of your overall body function such as pulse rate, temperature, and blood pressure. Though we don’t always like it, measuring these factors is important because it gives the doctor, and us, a clearer picture of how healthy we are or where we may have problems.
Just as doctors and nurses must check our vital signs, we have to check our business’s financial vital signs to determine the relative health of our ventures.
- Gross Profit | This is the difference between your sales revenue and your cost of goods sold. The larger the difference the better. A higher gross profit indicates stability and sustainability of the business.
- Expenses | Expenses in business are separated into two categories – fixed and variable. While fixed expenses tend to remain constant, it’s important to regularly review variable expenses due to their more volatile nature. Small changes in prices of supplies or materials can have a large effect on your bottom line. Look for areas where prices have increased and adjust your pricing or lower your overall expenses.
- Cash Flow | Cash is like the blood that runs through your veins. It is pumped throughout your entire business and keeps everything functioning properly. Low cash flow can be a serious issue for businesses, especially if unexpected costs arise. Fortunately, there are options such as invoice factoring financing and accounts receivable financing to help your business speed up cash flow.
- Growth | Growth is typically a strong signifier of a healthy business. If your business is experiencing stable, consistent growth, you are likely doing well. However when growth begins to slow, you should act sooner rather than later before it plateaus, and eventually may even decrease. You should be cautious of rapid growth as well. While it may be a blessing, it can also create some serious operational and financial strains for your business.
- Budget Deviation | An important part of running a business is tracking your progress. Your budget deviation analysis allows you to compare predicted performance against actual results. This tells you if your business is on track for meeting sales goals and helps you keep spending under control.
Just as with your own personal health, you want to check these business vital signs regularly to ensure that your company is healthy and functioning well. Luckily there are no cold waiting rooms or paper shirts required to measure these factors, just good business practices and financial data.