Many business owners often wonder, “Is my business doing well, or is it failing?” Just looking at your sales and revenue can be very misleading. Here’s what you need to know…
Net income is what really matters. Net income is your revenue/sales, minus ALL of your business expenses. Too often business owners only look at their profitability per job, but do not factor in all the important expenses that calculate their bottom line (net income).
Here are 6 Ways to Tell If Your Business If Failing:
- Net income ratio is not at least 10%. Without proper accounting, this cannot be determined and a common reason why businesses fail. Whether it’s a one-month period, quarter, or annual period, net income divided by sales should at the very least be 10%. For example, if the sales for your business for the month of July 2021 is $40,000 and your net income for July 2021 is $3,000, the net income ratio is 8% ($3,000 divided by $40,000). This means your business if not profitable enough and change need to be made asap. Let’s say for the 2020 year, your business had $550,000 of sales with $100,000 of net income, then the net income ratio would be 18%. Since the net income ratio is well over 10% this Company is doing well and on the right track.
- Cash is low, or cash flow is slow. A business owner should, at the very least, have enough cash to cover 3 months of all business expenses. A business owner’s accounts receivable should mostly be under 30 days past due, if accounts receivable is mostly over 90 days past due, the business is in trouble. Remember, as the business owner, you get to choose how your business is run and when the customers should pay.
- The business owner does not know their net income, year-to-date. We get many business owners that reach out knowing their year-to-date Revenue/Sales, but they do not know their bottom line, net income. This a is big problem. If you are in this position, we would love to help! It’s somewhat common that business owners are working hard day in and day out, and have no idea if their business is doing well. Don’t let this be you!
- The business owner does not have enough money to pay their personal bills. If the business owner is working hard and still does not have enough money to pay their personal bills, this is a serious red flag the business is failing. In this situation, the business owner often needs to raise their prices.
- The business owner is not on a W2 through their Company. Whatever the net income is for the business, the business owner should have an annual W2 equal to about half their net income. For example, if a business has $1,500,000 of annual sales, $1,300,000 of annual business expenses, and annual net income of $200,000, the business owner should run themselves on at least a $100,000 annual salary W2. This way, the business owner automatically pays taxes throughout the year, ensures they are paying themselves enough to pay personal bills, and has an accredited salary amount if wanting to obtain loans or mortgage.
- The business owner is doing everything – To run a successful business, it takes a team. Too often, the business owner is doing the sales, the actual work, the marketing, the accounting, HR etc. A business cannot grow this way and won’t be able to handle many clients. Always remember to “Work on your Business, Not in your Business”.
Being a business owner is not easy, but it is very rewarding. Each month, the business owner should know where they are financially and touch base with their CPA or Accountant to confirm that their numbers are accurate.
If you want a second look at your financial statements, or a second opinion of your business profitability, schedule a free 30-minute consultation on our website. We can help you take your business to the next level!
Never quit and stay strong!
-Josh Simpson, Iraq Veteran turned CPA and Managing Partner of Simpson & Simpson Accounting, LLC