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How To Assess Your Small Business’s Financial Health To Avoid Bankruptcy

How To Assess Your Small Business’s Financial Health To Avoid Bankruptcy

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Oxygen is something that we rarely think about until we’re deprived of it. Without oxygen, we can’t survive.

The same thing goes for your business. In business, cash flow is your oxygen. Without cash flow, your business will eventually die.

Delaying bills and other temporary fixes are not going to solve your cash flow problems. They just simply put a bandage on the issue.

Today, I’ll tell you exactly how to assess your business’s health to gain clarity and position yourself for success.

We hear about business owners pulling their hair out and going in debt and yet, we see other people thriving. The people who thrive have that system creating cash flow for them, year after year that allows them to have a financial independence.

Understanding your business’s health and vital signs is the crucial first step in running an efficient business. If you don’t know how your business is doing you can easily go bankrupt.

Let’s dive right in.

1. Current Cash Balances

Make sure you know your current cash balance. Your cash balance funds all your resources and will also help you stay afloat if necessary.

Understanding how much cash is in your bank is super important, but a lot of people still don’t even know that number!

We need to understand current cash balance in our bank because Cash is King.

2. Your AR

AR stands for Account Receivables.

Know which people and companies owe you money so you can go out and start reclaiming these debts. Whether it’s from vendors, supply partners, or even employees, make sure that you don’t have too much pending AR.

A lot of us are spend so much time working on the business that we forget people owe us money! These are low hanging fruits that we can use to up our cash balances.

Understand who owes you money and go get your cash!

3. Cash Flow From Operations

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This acts as your status quo – how much money are you spending on your operations each month?

If you’re running at a loss every single month, knowing how much cash flow you’re going to be out is the only way to diagnose the problem.

Now that you understand how much to budget, you will know how much profit you can anticipate to receive in the months to come. This way you can plan for investment purposes.

4. Cash Burn Rate

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The fourth thing that you need to understand is your cash burn rate.

This is your total expense on a monthly basis. You should understand this even when you’re not in operations.

What is your cash flow burn rate? This is super important.

A lot of people don’t understand that that if customers don’t come, you still need to pay for rent, you still need to pay for your accounting. Your labour costs, for example, still come into play to keep your operation up and running.

Your burn rate is the minimum revenue you need to achieve in order to break even. So many people don’t know this number, which is why they’re just rolling in the dark. They don’t know where they heading, they don’t know what’s break even for them.

Your cash burn rate should be a huge milestone for you and your team.

5. Variable and Fixed Expenses

Now let’s identify the difference between variable and fixed expenses.

Rent is a fixed expense, because regardless of circumstances you still need to pay it. Labour, on the other hand, is a variable expense because it depends on the number customers and staff needed. Your cost of goods sold is also a variable expense because the more meals you serve, the more you need to order.

Find your variable expenses and fixed expenses. This allows you to understand which levers to pull, and which expenses you can cut down on when necessary.

6. Payment Deferrals

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Items that can be deferred are payments that actually come with terms, whether it’s a 30 day credit or a 60 day credit. Depending on your situation these could be payments to your landlord, vendors, or suppliers.

This is super important because running a restaurant has tight margins. Without understanding the different payments that you can defer on, it becomes very difficult to run that tight ship.

Deferring allows you reinvest that extra cashflow into growing your business, or get through a rough patch.

We want to be able to build a thriving business that can give us financial and locational freedom, but it takes time!

7. Additional Funding

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This funding can be from your line of credit, your existing bank, your friends and family, or any government grants and programs that give out small business loans.

You need to understand the amount of extra cushion that you have. Identify your sources of additional funding, for when you need it.

Having 0 cash flow drives businesses to the ground. Even just an extra $10,000 can keep your business afloat, so all of your hard work doesn’t go to waste.

Before you even hit that point, you should identify your additional funding sources.

8. Inefficient Assets

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These are assets that are not making you any money whatsoever. You should actually liquidate these for cash!

For example, let’s say you have a food truck sitting in the back of your restaurant that you haven’t used in a year because you know it doesn’t fit your future business plan. Sell it! This way you can get your money to work for you.

Find all the inefficiencies in your business so you can run a lean, mean machine that’s going to generate cash all the time.

9. Personal Burn Rate

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This is something that rarely anyone talks about because we focus so much on business health that we neglect
our personal burn rate.

We still need to have a place to live, a car to drive, and additional spending money. Identifying how much you spend on a monthly basis is crucial so you can funnel the excess into your business when push comes to shove.

This also allows you to put more money aside from the business side of things to make sure that you have profit in your pocket.

10. Excess Fat

Identify these things within your business for times of crisis during recession. Your excess fat are things that are not a necessity for you to run your business, things that are just nice to have.

For example, some business software gives you access to millions of articles, but at $100 a month, it should considered as an excess.

We always forget about all these excess factors that we’re carrying, but it can damage the health of your business if you’re not aware of it.

Identify these excesses to run a much more efficient business.

11. Expansion Plans

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Whether you’re thinking about creating a franchise or working on a new location, you should identify your expansion plan.

You need to make sure that you have as much cash in your pocket as possible to go through potential hardships like the recessions or pandemics. Having an expansion and backup plan allows you power through tough times or put aside until later if necessary.

It’s rare that we take ourselves out of the business, and evaluate these different arms and elements that we’re working on. Maybe you’re thinking of buying a food truck to help expand your brand awareness. However, you would be spending $30k+ on it, which is not a necessity.

You have to come clear about where you have enough resources and time to expand, to make informed choices that are in your business’s best interest.

12. Summary of Action Plan

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Now that you have identified the 11 vital signs of your business, it’s time to put them all together and create a Summary of Action Plan for the next three months.

For example, if you know for a fact that your business is going to owe $15,000 in the next three months, you can make a plan for where to get the funding, and how to return back to normal afterwards. This becomes your action plan.

It’s super important to actually put everything together into a plan of your design, and to use this time to communicate with your partners, vendors, lenders, and most importantly, your team to get everyone on the same page.

This gives you confidence and reassurance. It becomes part of the culture that you want to create.

So there you go. The 12 ways to assess the health of your small business.

Knowing these figures is the differentiating factor between running a business into the ground, versus great success.

For more information on how to write a business plan, check out this video here!

Take action now and believe that you have the confidence to push through, one step at a time to making your business healthy and thrive.


If you are an aspiring restaurant owner or food business owner, reserve your seat to my free masterclass, where I show you how to transform your idea to build a profitable restaurant business. You’ll see how I use my signature ACE formula, which I used to build my ice cream shop into 7 locations worldwide, and how others used it to build their own food business from scratch.

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