7 Questions to Calculate Your Business’s Performance

If you think about your business and say, “It provides enough to live on, and I have a little left over,” this article is for you.

As a business owner, you want your business to succeed. Otherwise, you would not be investing your time, effort and resources into growing it. However, few business owners know how to evaluate their business’s performance. Understanding that performance is essential to determining whether your business generates enough income to meet financial goals, such as saving, investing, and building the assets needed for retirement.

Answering the following seven questions will help you calculate your business’s performance while keeping your personal goals in focus:

1. Are the business’s finances separate from your personal finances? An entrepreneur’s business often becomes their life, blurring the necessary separation between personal and business finances. However, keeping your personal accounts separate from your business accounts is essential. It is equally important to have the appropriate business structure in place to ensure you are properly compensated as the owner.
2. How much money have you invested in the business? You need to know how much you’ve invested and how much of the profits you’ve reinvested in the company’s operations. For example, if you invested $30,000 to start the business and then bought $20,000 in equipment, your total investment is $50,000. It’s important to balance reinvestment in the business with your personal financial goals.
3. What is the profit after paying all expenses? If you invest $50,000 and the net income for the year is $5,000, the return is 10%. Note that we didn’t include the owner’s salary as income because, if the owner weren’t working there, the compensation would be paid to another manager. You need to distinguish between income from work (salary) and profit from the business’s return on investment.
4. Do you know the value of your business? If you plan to sell it to a third party, they need to know its value. In the transaction, the buyer would acquire the business’s future income, while you would stop receiving it—something to consider before selling. You can estimate these figures by calculating the company’s return on invested capital.
5. Would you be willing to pay the amount you believe your business is worth? This question captures the essence of the business’s value. As a seller, you’ll try to maximize the selling price, while the buyer will prefer to acquire it for the lowest possible price. Often, owners overestimate their companies’ value because of their affection for them and the years they’ve dedicated to them. Remember, knowing whether your business is profitable will protect your capital and help you make the best investment to safeguard your financial future.
6. Do you have an exit strategy? Over time, often without realizing it, some owners develop a mutual dependency on their business: the operation and finances depend on them, and they depend on the business. Therefore, it’s important to develop an exit strategy before you need it, whether it’s due to an unforeseen event or because it’s time to retire. Learn more about these strategies in our article “Exit and Succession Plans: Key Decisions for Your Business.”
7. Have you assessed the family dynamics? Close family members often become involved in the business. As the owner’s financial life becomes intertwined with the company’s, the family often becomes part of daily operations. Therefore, consider whether your children or other family members would be willing to buy the business upon your retirement and the impact that would have on family dynamics.

These questions are just the beginning of staying on track with your personal goals and protecting what you’ve built with so much effort.

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This article is for informational purposes only and does not constitute an endorsement or guarantee of accuracy or applicability for any particular purpose. Neither Popular, Inc. nor any of its affiliates, subsidiaries, and/or related companies shall be liable for any special, direct, or indirect harm stemming from the information contained in this article. Should you require further information or guidance with regard to this article, you should always seek the advice of a competent professional of your choice.