Small business health checklist

Running a business can be a fairly hectic job. There’s often so much going on that it’s difficult to find the time to sit back and assess how well your business is performing. 

Even if you do find the time, many people aren’t sure what to look at to get a clear picture of their business’ health. 

To make things easier, we’ve created a handy business health checklist for small businesses. Checking these Key Performance Indicators (KPIs) will show you in plain figures just how your business is doing in terms of:

• Productivity
• Efficiency
• Liquidity
• Solvency
• Profitability

A healthy business is a productive business, so measuring productivity is a good indicator for long-term success. Productivity is a measurement of output over time. Your output is usually expressed in units. 

Measuring your output and dividing it by working hours will show your overall productivity. For example, 50 units per hour.

But measuring productivity on its own isn’t enough. To get a true picture of business health, it’s best to measure productivity alongside efficiency. 

Efficiency measures your total output compared to the resources needed to produce it. Ideally, you want to be reaching your output targets with little to no wasted resources. 

Resources include anything needed to create your product or service, like money, work hours, equipment, or energy. The goal is to have a productive business (reaching a high output) that’s also efficient (wasting minimal resources). 

If your business is both productive and efficient, then you’ll probably see a good return on investment (ROI) on all of your resources. In other words, you’re making more money than you’re spending. 

Figuring out efficiency is fairly simple. Just divide output by input, like this:

• Efficiency = Output / Input

For example, if you run a coffee shop and you sell on average 200 coffees a week at £3, then your average monthly output might be around £2400. Then, say your average monthly expenses are typically £1600 when you break up supplies and monthly payments; that’s your output. With these numbers your efficiency would look like this:

• Efficiency = £2400 / £1600 = 1.5

Describe it as a percentage by multiplying it by 100, and you can see this particular example shows 150% efficiency.

Liquidity measures how easily something can be converted into cash. For a small business, liquidity is a good measure of health because it can tell you how much cash is readily available. 

Measuring liquidity comes down to comparing your business’ liquid assets (like cash and securities) to your business’ liabilities (money your business owes). In simple terms:

• Liquidity = current assets / current liabilities

Liquidity is a good measure of business health because it shows your ability to pay short-term financial obligations like payroll, utilities, and loan repayments. 

Solvency is a term that describes a business’ ability to pay off its long-term financial debts. In other words, it’s the assets of a business compared to its liabilities. 

By measuring solvency, businesses can estimate their long-term financial health. If there aren’t enough assets to cover the cost of liabilities, the business is referred to as insolvent. 

A certain amount of debt can be healthy for small businesses. But taking on too much debt without the assets to pay it back can quickly drive your business into the ground. 

That’s why solvency is often measured next to liquidity; businesses need to find the right balance between debt, assets, and income.

There are three basic ways to measure the solvency of a business:

• Debt-to-asset ratio
• Debt-to-equity ratio 
• Debt-to-cash flow ratio

It’s worth noting that some external factors can affect your solvency. For example, a change in legislation or tax codes could directly impact your cash flow or profits, which would affect your ability to repay debts.

Also referred to as “debt ratio”, it compares your assets to your liabilities. 

A lower debt-to-asset ratio shows you’ll always have the money available (through selling assets) to pay back debts, meaning your business will look less risky to potential investors and banks.

Companies with shareholder equity can use this ratio to measure solvency. Equity is the total value of a company after all its assets are liquidated, and liabilities are paid.

This ratio compares the amount of available cash a business has compared to its long-term liabilities. 

The Debt-to-cash flow ratio is useful because it shows how easily a business can repay its debts without selling any of its assets. 

Profit is the primary goal of most businesses, so it’s usually a good indicator of a healthy business. The idea is to earn more revenue than you’re spending to produce a significant profit margin.

There are two ways to measure profitability:

• Gross profits: The money left after deducting the initial costs of the goods you’ve sold. 
• Net profits: The money left after deducting all business expenses. 

You can use your recorded profits to work out your profit margins, telling you how much you’re making per sale, like this:

• Profit margin = (revenue – expenses) / revenue  

The result will be a percentage telling you how much actual profit you’re making for each sale. Unfortunately, it’s difficult to say exactly what a healthy profit margin is because some businesses are more profitable than others. 

If you’re not sure, check out successful businesses in the same industry and find out their profit margins. Also you can try our free profit margin calculator.

Before you can improve the financial health of your small business, you’ll need accurate, up-to-date, information about your finances. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.