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.

Here’s The Right Way To Do Extended Warranties

Aaron Hoos

Extended warranties.

They suck, right?

I should know, I sold ’em too. (Well, I sold a type of them when I was doing leases.)

Look, we all what the deal is: extended warranties are high dollar gambles that most often sit as piles of cash in a giant vault and the Scrooge McDucks that sell extended warranties just swim around in the money.

Last time I bought a laptop, I knew exactly what I wanted before going into the store. I went in, got a clerk to get me the laptop, and then braced myself for the silliness that would follow.

It was a dance: The clerk gave all the lines and I tried not to roll my eyes while I heard things like, “My customers are always glad to have it,” and “You just never know,” and my personal favorite: “more and more computers are breaking down these days.” Then I say no. Then they ostensibly go talk to their manager and come back with a slightly lower quote because they like me. Then I say no again and they wish me well and send me to the cashier.

Same thing happens when I rent a car. And when I buy one. And when I buy any major electronic equipment or appliance.

Sure, the money is good for the companies selling them but let’s face it, extended warranties are silly:

  • They are rarely needed
  • If a circumstance arises where they are needed, they are often forgotten

… they’re basically cash. And customers know it. So you either end up with a customer who begrudgingly pays, or you end up with a customer who chooses not to pay but is still annoyed anyway because they have to put up with the BS of the extended warranty sale pitch.

Every knows it’s just a bump in the price of whatever product you’re selling.

And if ever there was an opportunity for a company to innovate on the financial side of their products, extended warranties is the opportunity.

So, when I was bought a new freezer recently, I was pleasantly surprised…

I chose the freezer and braced myself for the inevitable extended warranty pitch.

I got ready to say “no” until the salesperson added: “If you don’t use it, you get 100% of it back.

That changed everything.

… If I don’t use the extended warranty, I get 100% of it back.

It works like this: I pay now for the extended warranty coverage. The freezer is covered for 3 years from all the various things that the extended warranty covers. And at the end of 3 years, if I didn’t use it, I get the money back. (Mind you, I get them money back as a store credit.)

This is a small change but it’s huge. I think it’s smart. And I think more and more companies should adopt it as a strategy to sell their extended warranties.

  • It’s still pure cash that piles up in your Scrooge McDuck vault so you can swim in it.
  • A few people will use the warranty, most won’t.
  • Those that don’t use the warranty feel like the store owes them money and will make a purchase at that store in three years.

So, this small change in extended warranties is a simple play to increase your income now but also lock in customers who will likely come back and purchase more. Because, chances are, if they have $50 or $100 or $500 that they think is owed to them by the store, they’ll purchase far more than that amount in a future purchase.

I’ve written before about how most guarantees are weak and I wished companies would give their guarantees some teeth. And this is a powerful extended warranty strategy that more companies should adopt.

 


Aaron Hoos, writerAaron Hoos is a writer, strategist, and investor who builds and optimizes profitable sales funnels. He’s the author of several books, including The Sales Funnel Bible.

The 5 steps to identify your sales funnel… This is the starting point of a more profitable business!

I frequently assert that your sales funnel is the most important asset in your business. It’s the structure around which you build your business, it’s the pathway that prospective buyers follow on their way to giving you money, and it’s a strategic tool you can use to grow your business.

The starting point for you to master your sales funnel and take control of your business is to draw out your sales funnel. Draw it out, add notes to yourself, and the document becomes the useful tool you can refer to daily in your business to help you make decisions and work on your business.

Here’s how to draw out your sales funnel…

1. IDENTIFY YOUR TARGET MARKET

You need a narrowly defined target market — one that is large enough to to market to, has enough money to pay you for your product or service, but small enough that you can establish yourself as an expert. (Note: “Everyone” is NOT your target market). Take some time to research your target market and learn about them. When researching, dig beyond the point where your target market’s needs intersect with your solution. Learn everything you can about your target market and you’ll uncover new ways to market to them and new opportunities to add value. To get you started, use this tool I created: 55 questions to answer when defining your sales funnel’s target market.

2. IDENTIFY YOUR TARGET MARKET’S MINDSETS

People buy a product or service to solve a problem or fulfill a need. They never rush out and buy the very first solution the millisecond they discover their problem or need. There’s a progression in their thinking:

  1. At first they discover their problem or need.
  2. Then they realize they have to do something about it.
  3. Then they seek out some solutions.
  4. Then they weigh those their solution options.
  5. Then they decide whether the solutions are worth the cost.
  6. Then they buy.

Those steps I’ve just outlined are an over-simplification of the “evolution of mindsets” that people go through before buying from you. For small purchases (like an impulse item in a grocery store check-out line), these evolutions are measured in seconds. For major purchases (like a house), these evolutions are measured in weeks, months, or sometimes even years. After researching your target market, write out the mindset evolutions that they are most likely going through. (Use the list above as a starting point but then make adjustments according to your knowledge of your target market).

3. OUTLINE THE ACTIVITIES

Once you know what your target market is thinking on their way to buying from you, you can craft marketing and sales messages around those thought processes with the goal of moving them from one step to the next. Activities are comprised of two things: The message you want to communicate and the action you want your target market to take.

Pro tip: Don’t try to get your target market to move from their current mindset to the point of sale. Just get them to move to the next mindset in their mindset evolution.

4. DEPLOY TO CHANNELS

Once you know who your target market is, you know where they like to spend their time and attention. Once you know what mindsets they have, you know what it takes to sell to them. Now you can use this information to put your sales funnel to work. Create marketing and sales messages (see Outline the Activities, above), and then put those messages in the channels (media) where your target market will notice them.

5. ADD PAYGATES AND DELIVERY

Your entire sales funnel “points” to a sale. And that can look very different from one business to another. Some businesses charge up-front and then deliver the product or service; some businesses deliver first and then charge. And there are other paygate/delivery configurations as well. (Check out my blog post Sales funnel paygates for more information and for a list of other blog posts on this topic). Select a paygate and delivery model that will encourage the most purchases from your customers but will also ensure consistent cash flow and manageable accounts receivables for you.

A FEW CLOSING THOUGHTS

This really simple step-by-step method to crafting your sales funnel is useful for new and existing businesses that need to optimize performance and improve profitability. It’s also just a starting point. Check out some of my other blog posts about sales funnels.

Case study: Increasing profitability with passive income

Businesses survive (and thrive!) by continually generating income. But as a business owner, it’s easy to get caught up in a vicious cycle of performing a service, getting paid for it, performing another service, getting paid for it, etc.

That turns into a treadmill because you become dependent on that income and if you are not able to do the work, the income dries up. Additionally, you can’t grow beyond the time you have available to perform the service.

Therefore, if you are a business owner who wants to grow your business, you need to do it with passive income. Passive income is sometimes misunderstood. Some people think of it as “do-nothing-and-make-money”, which is basically impossible.

Rather, you should think of passive income as “work-once-and-get-paid-on-an-ongoing-basis”. That’s a big difference and successful passive income generation does require some initial investment of time, money, and effort.

Building passive-income-generating assets for your business is a great way to transition your business from a active (service-dependent) income to passive income. (If you’re looking for some ideas about passive income, check out this blog posts 5 levels of content monetization).

One of my clients came to me with that very problem. She is a well-known expert on the topic of finances but she was on a “treadmill” of services — consulting and speaking — that prevented her from growing her business a lot more. She had published one book, which helped her gain that expert status, but it was time to do more.

I brainstormed a few different options to help her generate some passive income and the one we decided to build first was an e-course that people pay to take.

First, we built a free e-course that provided great content. Second, we created a paid e-course that provided an advanced version of the free e-course. With so many people attracted to the free e-course, we were able to promote the paid e-course to a targeted, highly-interested audience, and people started paying my client for the course.

Just that one course wasn’t enough to completely replace and exceed the income my client was generating as a consultant and speaker, but that wasn’t her goal. Rather, she wanted to create a steady stream of income that continually trickled in, which is what is happening right now as people subscribe to her e-course.

And the best part is: Now that this e-course has been built once, it runs automatically and requires very little effort on her part to ensure that it continues. So the investment she made once will pay for itself and continue to pay her over and over again for years to come.

Here’s why I still do my own taxes by hand

It’s tax day today at my house.

Most Canadian personal income tax forms are due on or before April 30th, but the exception to that rule is if you own a business in Canada. Then your personal income tax forms are due June 15th. So I’m completing my taxes today and sending them in. (I didn’t mean to leave it until the last minute but some of the numbers for these forms are derived from my corporate income tax, which I just received back from my accountant on Tuesday afternoon).

It surprises people when they hear that I still do my taxes by hand — I write them out on the forms in pencil for the rough copy and in pen for the good copy. Very old school!

There’s a very simple reason for it:

When I used to be an employee (years ago), I would get my paycheck, look at the after-tax (take-home pay) number and be happy with that. I completely ignored the pre-tax amount and the enormous amount of taxes I was paying. And, like most people, I got excited when I received my tax refund… as if I had just won the lottery. But tax refund money is MY money and I had inadvertently loaned to the government as an interest-free loan. That’s why I think it’s a good idea to owe the government money on your income taxes.

After I started my business, I quickly became aware of the inordinate amount of taxes that one has to pay; I became increasingly aware of the disparity between my pre-tax income and my post-tax income. And, I started to learn about all the ways that businesses can legally reduce their tax exposure (i.e. with deductions for business expenses).

That knowledge (of my pre-tax and post-tax income, as well as opportunities to legally reduce the tax I pay) is worth thousands of dollars to me every single year. That knowledge is something I don’t want to lose. I want to be regularly reminded about the impact that every incoming and outgoing dollar has on my income tax. I want to be reminded that a big chunk of every dollar I earn is going to other things. I want to understand the influence that tax has on my business. It’s similar to why I mostly remodel my own home. The knowledge is very useful to have.

I could have my personal income taxes done by an accountant. Or I could do my taxes on software. But I know my myself well enough to know that as soon as I remove myself from sweating through those numbers with pen and paper in hand, that’s the moment I stop paying attention to taxes in my business. And before long, I’ll join the many people who mistakenly look forward to tax refunds and miss out on additional legal tax-reduction strategies.

So today, I’m sweating through some numbers and I’m probably in a bad mood (because I generally think I’m over-taxed and today of all days I definitely think that!). But it’s a good practice that I intend to maintain for as long as Canada Revenue Agency accepts paper forms.