A typical question every entrepreneur or manager has often in the mind is how understand if the business works, in this video I want to give some points to analyse the health of company.
The understanding of a business is a mix of many indices and everyone can have a different evaluation in a business or another. First of all, we have to define what we mean with the idea of business that works. We can consider a business that works a business that generates profit but also a business competitive in its market and, to do it, a business that invest constantly on improving. Now that we have defined the target of analysis, we can check 4 important points to study a business:
- How much and which are the investments to improve or grow
The investments are a base in the concept of entrepreneur but often, after a period, many companies start to reduce them and normally this is a warning. Without investments the company can’t improve and without improving the company loses competitiveness. A second point but not secondary, is the quality of the investments and, very important, which are the results they deliver.
2 Profit and its evolution in the period
The profit in a business is essential but not as many people think to enjoy the big money, the profit of company is the engine of the investments in the business. A business without investment is a zombie, it can generate profit for also long time but normally another business replaces it in a relative short time.
Profit is the life of business and it should grow constantly to keep a good level of investment. To evaluate the real competitiveness, the growing must be benchmarked with competitors and, in general, with the trend of market. A growing higher than market is positive, lower negative. In some case a negative profit could be considered positive if the market works worst, this is the classical example than happens in a crisis.
- Debt situation and its sustainability
Many people think that the debt is negative, this is not true, normally it’s positive but, as everything, the real evaluation depends on other factors. The first factor to evaluate is the sustainability of debt, if the debt is too high for the company, the interests will kill the cash flow and profit, this will reduce investments and, especially in the medium period, the competitiveness of company. No debt means probably not enough investments in the future of company or the complete use of the cash flow, this could be risky.
- The competition in the market and the position of company in it
The competitiveness is one of the main keys to evaluate a company. If the competitors offer always a better products or service, the destiny of company won’t be so funny. The control of the competition should be done constantly, we have to know what the others offer, which services and how the market is going. Only with a direct control of market we can adapt our strategy and do the right investments.
If we have a restaurant, we should visit the others, check their service and menu, talk with the other managers to understand their point of view and collect useful information also from customers. If we have a shop, we should check the products and the customer experience of competitors, also online; the same if we produce something or if we are B2B. We can also buy databases or statistics to have a more realistic benchmark. We need to know very well where is collocated our company in our market.
Keep in touch and stay competitive!