One glance at my bank statement and I know the state of my finances. One simple figure (most often smaller than I’d like) tells me all I need to know; pretty straightforward. But I’m not running a business. If I was, I’d need to see a lot more than a number to know how things were going.
Just as a number on a scale doesn’t reflect a person’s overall health, a balance sheet can’t provide a comprehensive insight of a company’s financial state. It indicates profitability, sure, but is only one measure of a company’s health. Look at your balance sheet and you’ll know where your company stands today. To know where you’ll be tomorrow and ten years down the road, you need to take a look at several other—perhaps less evident—factors.
1. Organic Talent
Healthy companies rely on the talent within their organization to grow and succeed. They have a relatively low turnover and tend to promote from within. Their ability to do so reflects solid initial hiring decisions and strong leadership.
A commitment to promote from within also motivates employees and gives them confidence in their abilities. It contributes to a positive corporate culture where workers don’t have to feel expendable or in competition with outside recruits.
2. Work/Life Balance
It may seem counter-intuitive but healthy companies are not necessarily those whose employees work 60 hour weeks and haven’t seen the sun in months. Organizations such as this, which demand overtime and encourage weekend work, tend to be staffed by burned out employees whose passion for their work has been stifled by an excess of it.
As Margaret Heffernan states in her recent article for Inc., the most successful companies encourage their employees to have full lives outside their office. They provide ample vacation and sane hours. They grant their employees a say in when and often where they work. If a writer’s most productive hours are from 9-11 at night, they encourage him to work at this time.
Employees who are encouraged to have a work/life balance are loyal to their employers, inspired by their outside lives, and all the more likely to be passionate about their work.
Healthy companies have committed customers, customers who continue to give their business beyond the first deal. Customer loyalty signals a company delivers; its prices are reasonable and its work is quality.
A company with high sales revenue stemming from several one time deals may be healthy now, but unless it can foster these relationships and deliver what its customers want, its success won’t continue to the future.
All companies incur expenses, especially in their start-up months. For some organizations, these expenses tend to rise with sales. As new customers come in, it’s often necessary to increase costs. Businesses may need to hire, expand, or purchase new equipment in order to meet these demands.
When faced with this situation, healthy companies tread carefully. Rather than commit to permanent purchases and hires and increase fixed costs, they adopt a trial approach. At the start of a boom in business they may bring on temporary help or rent additional space. In order to avoid the burden of elevated fixed costs should demand die down, they keep expenses variable until they are assured sales will remain consistently high.
If you’re a start-up company and in need of some assistance evaluating the health of your organization, contact our start-up accounting and CFO services experts.