The Small Business Financial Health Scorecard

Aaron Hoos

Your business might be making money, maybe even a lot of money… but that doesn’t mean it’s healthy. But keep reading because I’m sharing a Small Business Financial Health Scorecard that can instantly give you clarity to help you create a strong, profitable, money-making company that grows without stress.

But let’s start with the bad news…

THE BAD NEWS

The entrepreneurial graveyard is littered with companies that looked like they made money but were forced to shut down. To the uninitiated, it doesn’t make sense—how can a money-making company be forced to close its doors?!?

But those who have started businesses can tell you: a money-making business is not necessarily a healthy one. There are other financial factors, too. For example:

  • Maybe a business makes some money but not enough to survive on.
  • Maybe a business generates some revenue but its high expenses keep it from being profitable.
  • Maybe a business generates makes some money but its receivables are too high; it’s just not collecting enough of that money soon enough.
  • Maybe a business grows too fast and can’t get the money needed to buy the raw materials to assemble more of whatever it sells. (That one is surprisingly common, and, when combined with the receivables problem, it’s a business killer.)
  • Maybe a business generates a healthy income but the owner is so central to the income generation that they just can’t grow. (This was a problem in my business for a while.)

There are other financial reasons, too, but those are big problems. And they can be catastrophic.

So, how do you make sure that your company isn’t just making money but is actually healthy?

I’ve created this Small Business Financial Health Scorecard to review against your business. Use it to identify how healthy your company’s financials are and to get clarity on the ways you can create a financially healthier business.

SCORECARD OVERVIEW

Use the Small Business Financial Health Scorecard every quarter. (You may be tempted to use itmore often than quarterly but I think a quarterly effort gives you time to set goals, take action on those goals, and see results; whereas if you try to do it more frequently you’ll end up with a bunch of goals, too many actions to do, no time to do those actions, and no real results).

There are 7 key financial measures on the scorecard, and they describe how money is made, processed, and used in your business:

  1. Producing
  2. Processed
  3. Paid
  4. Propagating
  5. Predictable
  6. Profitable
  7. Passive

… in that order. (The order is important).

Here’s what they mean:

  1. Producing: Your business is generating revenue.
  2. Processed: Your business has systems in place to send invoices, follow up on receivables, process transactions, pay vendors, and pay taxes.
  3. Paid: Your business is actually collecting the money you are invoicing.
  4. Propagating: Your business grows and the money you are making grows as well.
  5. Predictable: Your business is bringing in money in a consistent way, ideally the same amounts on the same day of the week or month.
  6. Profitable: Your business generates more money than needed for all of the previous points of the scorecard, leaving extra money at the end of each month or quarter.
  7. Passive: Your business generates revenue without regular effort (perhaps best explained as a large, single up-front action that creates ongoing income, versus the need to trade hours for dollars).

SCORING

At the end of each quarter, go through each of these 7 points on the scorecard and score yourself. It will take less than five minutes but you’ll get a very clear picture of the financial health of your company, as well as some smart strategies to improve.

Here’s how to score yourself: For each one of the 7 financial health measures, give yourself a score from 0-4, as follows:

0 = “Nope”. (It does not happen at all.)
1 = “Not really”. (It happens some of the but time less than 50% of the time.)
2 = “Not always”. (It happens some of the time but less than 75% of the time.)
3 = “A lot”. (It happens most of the time but less than 100% of the time.)
4 = “Dialed in! (It happens 100% of the time, every single time, without fail.)

This is the other reason I recommend that you do this every quarter: you might have a really good month and score yourself a 4 on something in the month… but over a quarter it’s harder to sustain best practices so you get a better sense of how things are going on an ongoing basis.

So, let’s look at an example from a fictional company, just to see how the scorecard works:

  1. Producing: The company is generating revenue and the business is working at about 90% capacity, so they’d score a 3
  2. Processed: The company has some systems set up and is able to process most transactions, pay most bills easily, and usually pays taxes on time (but admittedly it’s not perfect), so they’d score a 3
  3. Paid: The company gets paid immediately so they don’t really have any receivable issues at all, so they’d score a 4
  4. Propagating: The company is is not growing so they’d score a 0
  5. Predictable: The company is making money but it comes in completely unpredictably so they’d score a 0
  6. Profitable: The company makes a bit of profit, on some things, but not a lot, so they’d score a 2
  7. Passive: The company’s money is completely tied to the amount of time that the owner spends in the company (and if the owner was away, no revenue would be generated, so they’d score a 0

Part of the value of the scorecard is that it balances simplicity with objectivity. In general, multiple people with the same level of awareness about a company should each be able to complete the scorecard and score roughly the same score, while also still keeping the scoring within a reasonable time-frame.

HOW TO ASSESS THE SCORE

When you score your company quarterly, you’ll assign a score to each one on a scale of 0-4. Ideally you’re aiming to have a company that hits 4 on each point (or, a mix of 3-4, which is probably more likely).

However, many companies won’t hit 3s and 4s across the board. Instead, there will be a variance. The scorecard will not only give you an overall picture of where you are weak and where you are strong, it will also help you to know what to work on first: once you’ve scored yourself, the next step is to find the “first lowest score” and work on that one for the quarter.

Here’s what I mean when I say the “first lowest score”: Starting from the top of the list (Producing) look down the list until you get to the financial measure with the lowest score. In the case of a tie, choose the one that comes earlier in the list. Let’s use the scoring example we’ve been running through so far…

  1. Producing = 3
  2. Processed = 3
  3. Paid = 4
  4. Propagating = 0
  5. Predictable = 0
  6. Profitable = 2
  7. Passive = 0

… then you start at Producing and go down the list, and you noticed that Propagating, Predictable, and Passive each share the lowest score (a score of 0). But, since Propagating is earlier in the list than the other two (it’s the first lowest score in the list) that’s the one you need to work on.

The reason is: you can theoretically work on any of the 7 points on the scorecard, whether a great score or a weak score, whether earlier in the list or later in the list, but the scorecard was put together in a strategic way that can help you build a stronger business by focusing on the earlier ones in the list first and dialing those in before moving on to the later ones, thus helping you build a strong foundation and then build a stronger business on that strong foundation.

HOW TO TAKE ACTION

Once you have found the first lowest score for the past quarter, create a simple action plan with a few achievable goals to improve that area. Here are some ideas:

  1. Producing: You need to work on your marketing and sales to get more customers coming through the door.
  2. Processed: You need to work on your systems and processes to make sure you can accept the money and pay your bills.
  3. Paid: You need to work on your invoicing and receivables to ensure that you are getting paid in a timely fashion.
  4. Propagating: You need to build a strong, self-funding growth plan.
  5. Predictable: You need to build marketing programs, promotions, and products, that bring in income regularly; you should also reach out to past customers especially during slow seasons.
  6. Profitable: Review your income and your expenses; look at how income increases and expense decreases will impact your financials.
  7. Passive: Build or invest in income-producing assets that “decouple” your time from your effort so that you can continue making money even if you are not working in your business.

Work on this action plan for the quarter and then score yourself again.

And again the next quarter.

And again the next quarter.

… and so on.

KEEP GOING

You’ll want to score yourself every quarter from now on, and keep those scorecards.

That way, you’ll create a baseline for the health of your company’s financials but you’ll also see how other changes in your business will impact your score. For example, perhaps you grow dramatically one quarter—that growth is great but could also break some of your invoicing systems and processes, so you may notice a higher score in Propagating and Profitability but a lower score in Processed or Paid. Constantly scoring yourself will keep you aware of the financial health of your business while also giving you a clear and simple strategy to growing a financially healthy company.

Consistent reporting on the financial health of your company with a clear plan on how to grow, all while keeping it simple. That’s the power of the Small Business Financial Health Scorecard.

Ascending From Entrepreneur To Leader

Aaron Hoos

For years I wanted to be an entrepreneur. To me, that meant owning my own business and doing my own thing; not having to commute to a company and work for “the man”. (Truth be told, I’m just not wired to thrive in that kind of environment).

But building a business was hard. I struggled, failed, then tried again and figured it out…

… to a point.

Problem was, years down the road, I found myself in a different place: I was successful by some measures but also struggling by other measures: I began to discover that I was the bottleneck in my own business. I was hitting a ceiling because I was trying to do it all.

So I specialized, starting more focused companies like Real Estate Investing Copywriter.

Later, I built systems to help me create better content and serve more clients faster.

Later, I started building replicatable, duplicatable products and commoditized services that allowed me to shorten the timeline between client acquisition and deliverable.

Later, I started building a team—first an assistant and then writers, even going so far as to create what might be considered an agency.

Although my goal has always been to be a business owner and entrepreneur, I realize that I’m ultimately becoming a leader:

  • A leader in the industries I serve: by being a thought leader and influencing brand
  • A leader for my clients: by helping clients elevate their knowledge, make decisions, and see results
  • A leader of people: by building a team and providing them with an income while having an impact
  • A leader of innovation: by leveraging what I know and do to create new opportunities for my clients and team
  • A leader of the future: I lead my industry, my clients, and team, toward a bolder, brighter future

It’s a journey for me. If you’d asked me years ago if I thought I would be a leader, the answer would be a resounding no… simply because the only thing I wanted was to be a self-employed writer.

But I realize now: that “self-employed writer” was just step 1. And since that realization, I’ve been on a path of ascension and am constantly learning to embrace my new role as leader.

Want to make the same ascension yourself? Make this simple change to your thinking to get you moving in this direction: Find more people to rely on you. Whether it’s the industry at large, your clients, or your team; build a business that compels other people need to rely on you for your expertise, skills, compensation, etc. It’s weird; there’s not a “thing” you need first before becoming a leader, just build a business that gets people to rely on you.

SUMMARY

When I was “just” a self-employed writer, my job was to wake up each day, sit down at my computer, and writer. Today, as a leader of my industry, clients, people, innovation, and the future, my job is much different: I must constantly build; growing my knowledge, authority, and business to fulfill my role as a leader.

It’s a higher level and a bigger challenge but if I want to take part in a bigger and more opportunitistic future, being a leader is the only way.

The Manifesto Of Hard (6/31) — Break It Into Simple Steps

This post is part of a series of posts based on my Manifesto Of Hard. If you want to create change in your life, embrace hardship and thrive in it. That’s what I’m studying this month, and this post shares some of those findings with you…

Why do people avoid hard things? I think there are 2 reasons:

First, the risks seem too high.
Second, the achievement of whatever the hard thing is seems too daunting.

Given those two challenges, people avoid hardship and default to the easier path.

But the hard thing is often the better thing.

I’ve already talked about how to deal with the risks when facing hardship. But what about the second aspect—achieving the daunting hardship?

The simple solution is also the most profound (yet most people make it more complicated than it needs to be). Simply put: break the hardship down into specific parts, and keep breaking it down into you end up with the simplest steps.

I’m not a football fan but I’m inspired a football coach who coached his team to victory by turning the chaos of sport into discrete and controllable steps. What the coach’s and team’s success revealed was: You can’t control everything but you should identify what you can control and control it.

This valuable strategy works day-in and day-out, regardless of the depth or complexity of the challenge that faces us.

When you’re faced with hardship, what can you control?

(See the original Manifesto Of Hard and check out all related posts about the Manifesto Of Hard.)

The Manifesto Of Hard (5/31) — Embrace Calculated Risks

This post is part of a series of posts based on my Manifesto Of Hard. If you want to create change in your life, embrace hardship and thrive in it. That’s what I’m studying this month, and this post shares some of those findings with you…

When you look at opportunities, challenges, or situations that seem hard, it’s natural to view only the costs, problems, and challenges. The problem is, the weak person and ineffective entrepreneur gets overwhelmed by those risks and can’t move forward.

But stepping up to tough challenges means accepting that there will be risks. You can’t get away from those.

The smart entrepreneur steps up anyway and embraces the risks—in a calculated way—to do the hard thing anyway.

When you face risks, ask yourself the following questions:

  1. What are all the possible risks?
  2. What is the likelihood of each happening?
  3. How do I turn as many of those risks as possible into advantages?
  4. How do I eliminate as many of those risks as possible?
  5. How do I prepare for any of the risks that may remain?

By asking these questions, you proactively face risks while meeting any hardship head-on.

(See the original Manifesto Of Hard and check out all related posts about the Manifesto Of Hard.)

The Manifesto Of Hard (4/31) — Embrace Change

This post is part of a series of posts based on my Manifesto Of Hard. If you want to create change in your life, embrace hardship and thrive in it. That’s what I’m studying this month, and this post shares some of those findings with you…

I’m fascinated by change: it’s a constant in life yet so many people work so hard (consciously and unconsciously) to resist change under the notion that change is hard. I used to feel that way too. I thought the ultimate life was one of stasis and I was frustrated by the amount of change in my life and the losses of relationships and opportunities that resulted.

Fortunately, at some point, I realized that change is a constant in life, and it’s good. I also realized that if I could embrace change, it would help me meet new people and get new opportunities that others wouldn’t get because they were afraid of change. It’s a trade-off, for sure, but I feel like I’ve come out ahead because of it.

If you want to create a richer life of more memorable experiences and a greater variety of people and opportunities, embrace change. Discover the power and beauty of newness even when you struggle with the discomfort of unpredictability.

Want to get really practical? Go a different route to work tomorrow. Order something different at a restaurant. Spend the evening doing something you’ve never done. Go for a weekend getaway to a small town you’ve never been to before.

… Start small and introduce little opportunities for change in your life and see where it takes you.

(See the original Manifesto Of Hard and check out all related posts about the Manifesto Of Hard.)