Eight Steps to Better Business Health in the New Year

As the year draws to a close, it's the perfect time to pause and evaluate the financial health of your business. Performing this year-end checkup is critical to ensure your eCommerce business is ready for next year.

Maybe you’re thinking, “Good idea but I don’t know what I should be evaluating.” If that’s you, I’ve got you.

Here are eight areas to look at in your eCommerce business as we close out the year.

Understand Your Financial Statements

1. Analyze Your Profit and Loss Statement: Your profit and loss statement shows your revenue for the year, less the expenses you paid to run your business. Look at your profitability for the year, but also look beyond this number. What products/services were profitable? Was there an increase in expenses? If so, understand why. Now is a good time to decide if there are products or services that aren’t profitable or places where you can cut back on expenses and increase profitability.  

2. Review Your Balance Sheet: This snapshot of your business’s financial standing at a point in time shows assets, liabilities, and equity. Assets = things your business owns. Liabilities = bills your company owes. Equity = the owner’s stake in the business. The key thing to look at here is that your liabilities aren’t outpacing your assets.  

3. Cash Flow Statement: You’ve heard it said that cash is king. Many business owners make the mistake of focusing on profitability but don’t pay as much attention to cash flow. But, having enough cash is vital to a thriving business. If the cash in your business doesn’t appear to be enough to pay debts and fund operating expenses or if you have negative cash flow, those are signs of trouble. Things that can negatively impact cash flow are having too much inventory, uncollected payments from customers, too much debt, and more. Make sure to run your cash flow statement to understand where cash is coming into the business and where it’s going out so you can make changes to optimize cash flow.

Calculate Key Financial Ratios

Reviewing financial ratios for your business can provide more insight into your business performance than the numbers alone can provide.

Here are key ratios that are important for your eCommerce business:

Debt-to-Equity Ratio: This ratio measures your business's financial leverage and risk. It’s calculated by dividing total liabilities by total shareholder’s equity. A high ratio implies a company has used more debt to finance its growth. Too high of a debt-to-equity ratio could be a troubling sign that a company may not be able to meet its debt obligations. A low ratio is less risky but could indicate a company may not be utilizing debt effectively to grow the business.

Current Ratio: This ratio gives you a picture of your company’s short-term financial health and liquidity. The formula to calculate the current ratio is current assets divided by current liabilities. A ratio greater than one usually indicates a financially healthy business. A ratio less than one could indicate liquidity issues, which means there aren’t enough current assets to pay off the current liabilities.

Gross Profit Margin: This ratio shows the percentage of revenue that exceeds the cost of goods sold and is a key metric to measure a company’s profitability. This ratio is calculated as revenue minus cost of goods sold expressed as a percentage. A higher margin indicates a company is efficient at producing and selling its products. A lower margin could indicate costs to produce products are high compared to revenue.

Assess Your Tax Position

Now is the time of year to reach out to your tax accountant to determine if you’ve paid enough taxes for the year. No one wants to be hit with an unexpected tax bill in the new year. Your tax accountant can determine your tax liability. They can review deductions and credits to make sure you’re taking advantage of all that are available to you. They can also let you know if strategic spending before year end could be beneficial to lower tax liability.

Compare Budget Versus Actuals

Hopefully, you’ve been looking at your budget versus what’s actually happening in your business throughout the year. But, either way, it’s time to get the budget out. Did you generate as much revenue as you’d projected? Were expenses by category within budget? If any of these numbers are off, now is a good time to figure out what went wrong and take it into consideration as you prepare next year’s budget.  

Evaluate Inventory Management

For product-based eCommerce businesses, inventory management is crucial. Are there items in inventory that aren’t selling? Do you routinely run out of items that are best sellers? Having an overstock of inventory or not having items on hand that customers want to purchase can negatively impact cash flow. Look at your inventory management over the past year and look for areas of improvement.  

Client and Supplier Relationships

Now is the perfect time of year to assess your relationships with suppliers and customers. Do you have favorable terms with suppliers? If not, engage in re-negotiating terms or finding new suppliers. If your customers pay on account, are they paying on time? If you’ve got a lot of old unpaid customer invoices, make an effort to collect them but also review your accounts receivable process to see where improvements can be made to speed up collection.

Set Goals for the Next Year

This evaluation will give you the basis for planning in the new year. Set financial goals like revenue targets, cost-cutting goals, or goals that improve cash flow. Thinking through your financial goals now will position you to start the new year off strong.

Embrace Technology

Look at your systems and processes to see if there’s room for improvement. Do you have a robust enough financial management software in place? Is your inventory management software adequate for your business goals? Are there apps you can implement to streamline operations?  Having the proper technology in place is not only cost-effective in the long run, but will help you focus on generating profit in your business instead of fighting fires due to inadequate technology.  

Evaluating your business’s financial health at year-end is crucial for strategic planning and growth.

Your business speaks in numbers, so to understand it’s health, it’s crucial to understand the story your numbers are telling you. Your numbers are the backbone of your business and help you evaluate its financial health. Performing this year-end wrap-up will position you for a prosperous new year.

Do you perform a year-end review? Let me know!