Australian Government figures show the five-year survival rate for small businesses is almost 60%, with the odds for medium business better at 76%. But considering there were nearly two million small businesses surveyed and a mere 82,000 medium-sized, the stats show that small businesses are doing an amazing job. The question is, how do you stop your business from joining the failed 40%? Will your business be around in five years? Here’s how you can tell.
Does your business take advantage of digital technology?
A classic example of a paradigm shift was when scientists realised the earth was not the centre of the solar system. While not as earth-shattering, there’s another paradigm shift occurring right now – the shift from businesses in the ‘real’ world to digital businesses operating in the cloud.
‘The cloud’ is just a cool term for the internet and the increasing number of uses we find for it, like data storage. As a business owner you no longer have to have office programs (such as Excel) downloaded to all your staff’s computers – programs can be accessed in the cloud by anyone from any PC by subscription.
You can fax in the cloud, sending and receiving faxes online without a fax machine or a fax line. If you are still servicing a fax machine, renting a fax line and buying reams of paper, you may want to look at online faxing. Reducing running costs means your business is healthier, as we will see below.
Do you know the importance of gross and net profit margins?
Gross profit margin and net profit margin are figures that tell you about your business’s health. The gross margin is calculated by subtracting the cost of goods sold from revenue, then dividing the result by revenue. So if you make $5,000 from goods that cost you $3,000, your gross profit margin is 40%. A higher margin means your company can afford to spend on equipment, advertising and running costs and still stay in the black.
Net profit margin is net income divided by revenue, net income being what’s left after you deduct the cost of goods and running costs. So if it costs you $1,500 to run the business example above, your net margin is 10%. If you see your net margin steadily falling, you need to cut costs to remain in business.
Does your business have a genuine plan?
Do you have a business plan or are you guessing the way ahead? Elements of a plan include your target market, your organisational chart, a list of staff you need and their salaries, your pricing strategy and your advertising campaign. Do you have an inventory list and a list of the technology you will need to keep track of stock and process payments?
Keep in mind that it’s possible to outsource your payment system to a cloud-based company, so you don’t expose yourself to the risk involved in handling client’s financial data. If you have staff, you need workers’ compensation insurance, and you should take out public liability and product liability insurance as well, where necessary. The government provides a useful business plan template to help you get started.
Is your own position sustainable?
Business health is one thing, but as an owner your health is even more important. What’s the point of profit if you are too busy to spend it, or working such long hours that there’s no time to stop and enjoy the fruits of your labour? In the end, your health is more important than any business. If you feel the strain is starting to affect you and your relationships, then take time away. Hand control over to a trusted partner for a month and come back rejuvenated, filled with fresh ideas and renewed inspiration.
Will you make a dignified exit from your business?
Your business plan should have an exit strategy built into it, whether it’s succession planning, closing the business or selling it. Succession planning means you will gradually hand over the reins to a business partner or a member of your family, something that can normally take up to two years. If you plan to close the business, you must sell off assets, give staff notice and deregister with ASIC. If you plan to sell, you need to do so when the books are showing profitability, since poor figures are off-putting to buyers no matter what rationale is offered.
So, how does your business stack up against these factors? Does the future look bright, or is time to make some adjustments?