Business Health Check – what is it and how it can help your agency to thrive
If you are the owner or senior manager of a Letting Agent, you should perform an annual health check on your business. This will provide you and shareholders with an opportunity to assess and review: the business’s needs, goals and provide a way to spot new opportunities for business improvement.
Such a check should cover a full evaluation of financial performance and business health. This is typically done by analysing financial statements and management data. This can include reviewing reports such as revenue, expenses, profitability, cash flow, in-arrears, client contracts, client churn, tenant churn, loans and debt levels.
A business health check should be a comprehensive process that helps understand opportunities but also, critically, business risks too. It can help owners and shareholders make better-informed decisions and put an agency on a consistent path to sustained annual growth.
How a Business Health Check would look like for a Letting Agent?
1. Review of Financial Statements
Review the income statement, balance sheet, and cash flow statement to understand the current financial status of the business. This will give a picture of the business’s revenue, expenses, profits, debt, and cash flow.
2. Ratio Analysis
Calculate key financial ratios such as the liquidity ratio, debt-to-equity ratio, and profit margin to evaluate the financial health of the business.
3. Review of the Rent Book and Client Account
Review the cash reconciliation process, review a sample of daily/periodic cash reconciliations (we recommend daily cash reconciliations). Review the cash allocation report, ensure that balances held on the account are not being held back incorrectly.
4. Review Agent Fee Billing Processes
Check that all management fees are raised for all rents collected. Check that all services performed are accurately billed to landlords. Check that all tenancy contracts have rent collected.
5. Ensure Deposits are correctly registered and returned within required timeframes
Ensure that all tenant deposits are correctly accounted for and registered on time with a DPS scheme. Review client contracts coming to an end that need renewing. Review processes to pay out deposits
Compare the business’s financial performance against industry standards to see where it stands in comparison to its competitors. Understand where your agency sits on a quartile basis and how to move to the next quartile.
7. Cash Flow Analysis
Analyze the cash flow statement to understand the inflow and outflow of cash and ensure that the business has enough cash to meet its obligations.
8. Cost Analysis
Evaluate the business’s expenses to identify areas where cost-cutting can be done without affecting the business’s operations.
9. Debt Management
Assess the business’s debt levels and determine if the business is taking on too much debt or if its debt levels are manageable.
10. Planning and Forecasting
Use your financial health check as a tool for making strategic decisions, making projections and identifying opportunities for growth.
Provide a summary of recommendations for improving the business health of the agency in actionable information.
To use a business health check for your business, you should start by gathering all of your financial statements and other relevant financial data. This might include things like your income statement, balance sheet, and cash flow statement. You should then analyse this data to identify trends and patterns in your financial performance. Look for areas where your revenue and profits are growing or declining, and try to understand why this is happening.
Also, pay attention to your expenses, and see if there are any areas where you can reduce costs without negatively impacting your operations.
How Often To Do a Business Health Check?
Once you have a good understanding of your financial performance, you can then use this information to develop a plan for improving your financial health. This might include things like increasing revenue, reducing expenses, or improving cash flow. It’s important to regularly check your financial health, at least annually, to monitor your progress and make any necessary adjustments to your plan.
Additionally, using financial analysis tools like ratio analysis, benchmarking, and forecasting can also help you to better understand your financial health and make more informed business decisions
How to use Business Health Check for your Business to Thrive?
It’s important to keep in mind that business’s health check is not a one-time activity, it’s an ongoing process that requires regular monitoring and attention. By regularly checking your financial health and making adjustments as needed, you can ensure that your business is in a strong financial position and well-positioned for growth and success.
Although you might think you’re on top of your finances, there’s always space for improvement. While ticking all the boxes in terms of fiscal health, it’s important to understand its building blocks in order to achieve long-term sustainability.
Although liquidity, solvency along with profitability are key indicators, we can say with confidence those are highly dependent on operating efficiency.
In other words, it’s vital for the business to keep an eye on the latter, as accounting, management, and efficiently handling services can make a big difference. Simply put, operational efficiency is an important factor and the more you have it, the lower your costs to generate the same amount of cash.
It only remains to figure out how to improve operational efficiency. Without going deep into numbers, the universal approach would be to somehow get more output for the same or less input.
This can be achieved by optimizing operational strategies, cost, employees, etc. Obviously finetuning these segments might take huge efforts and time, but it would be more productive to work with an expert company that would save your time and elevate your profit margins.
Oftentimes, working with a trusted expert company with trained staff who can do that job for a fraction of the price can be the missing part on your journey to build a healthy business.
The bottom line is that tracing financial ratios and tendencies would help monitor a company’s performance and make better decisions.