How to Tell if Your Business is Healthy...or Floundering
When someone asks: How's business? Do you really know what to say?
If you're like many business owners, you may roll along with the dim feeling that your business is holding its own. But in the back of your mind is the nagging feeling that honestly, you don't know for sure if you're falling behind the competition or pulling ahead.
Know how you can tell if your business is really thriving? Benchmark.
Compare your business to other businesses in your industry. As a recent article from small-business research firm Sageworks notes, you can get a better assessment of your company's health by comparing key metrics, including gross revenue, net profits, profit margins, revenue growth, liquidity and turnover ratios.
For instance, if your profit margins are 5 percent but the industry norm is 8 percent, that's a big red flag. Profits will be lower -- slowly starving your business of cash while competitors will be growing and outshining you. On the other hand, if you collect accounts receivable faster than the norm, you'll have better cash flow than similar businesses.
Many business owners don't benchmark because they think they can't get their hands on the data they'd need to compare business metrics. But there are quite a few ways to get some intelligence on your industry -- and some of them don't even cost much. Any benchmarking data you can scare up are better than none, as they at least give you a starting point to compare your performance.
Here are four ways you can find data for benchmarking your business:
Ask other business owners. Form alliances with similar businesses to yours, but located in other cities, so that you don't compete directly. Agree to share financials, and bingo -- you've got some fresh data to compare.
Use industry directories. In some industries, there are readily available reports or directories that list revenues and growth figures for many companies in the sector.
Ask an industry association. Industry groups often conduct polls of their membership in which business owners anonymously disclose information about their financials. While these won't tell you how individual competitors are faring, industry statistics often give you good general comparison figures on how a typical business in your industry is doing.
Buy or find market research. If you're willing to spend a little, there is market research available on every industry segment imaginable. Sometimes the information can be gotten fairly affordably. A few key statistics may be in a press release about a study, giving you a few benchmark figures to start. Or you can go all out and hire a firm to do custom research.
How do you benchmark your business? Leave a comment and tell us how your business measures up.