A consulting firm came to us last year, celebrating $800K in revenue (up 20% from the prior year). The owner was already planning how to spend the profits.
Then we calculated their financial health grade using the five metrics below.
They had 18 days of cash on hand (D grade). Their biggest client made up 35% of revenue (F grade). Their overall financial health? A solid D.
One delayed payment would have put them in crisis mode. They were putting themselves in danger and had no idea because they were only looking at revenue.
Here’s the grading system we used (and the one you should use, too):
1. Cash Runway: How Long Can You Survive?
Your cash runway is simple: If all revenue stopped tomorrow, how many days could you keep operating?
Take your current cash balance. Divide it by your average daily operating expenses. That’s your runway.
- A Grade: 90+ days of cash on hand
- B Grade: 60-89 days
- C Grade: 30-59 days
- D Grade: 15-29 days
- F Grade: Less than 15 days
Most US small businesses have 27 days of cash. That’s a D grade.
If you’re under 30 days, you’re one delayed payment away from a crisis. One client who’s “processing your invoice” can force you into expensive debt or missed payroll.
2. Profit Margins: Are You Actually Making Money?
Profit is what actually matters. Your net profit margin shows what percentage of every dollar stays in your pocket after all expenses.
Net profit ÷ total revenue × 100 = your net profit margin.
- A Grade: 20%+ net profit margin
- B Grade: 15-19%
- C Grade: 10-14%
- D Grade: 5-9%
- F Grade: Less than 5% or negative
Service businesses should hit 15-30% because you don’t carry inventory and can scale without massive cost increases. Below 10%? Something’s broken.
3. Accounts Receivable Aging: Are Clients Actually Paying You?
You can be profitable on paper and still go under if clients don’t pay. Your AR aging shows how much is owed and how long it’s been sitting there.
56% of small businesses have unpaid invoices right now.
The average amount owed? $17,500.
- A Grade: 90%+ of receivables current (0-30 days)
- B Grade: 80-89% current
- C Grade: 70-79% current
- D Grade: 60-69% current
- F Grade: Less than 60% current
Invoices over 90 days old? Get aggressive. Money you can’t collect isn’t yours.
4. Current Ratio: Can You Cover Your Obligations?
Your current ratio measures whether you have enough short-term assets to cover your short-term debts. It’s a snapshot of your liquidity.
Calculate it by dividing your current assets by your current liabilities.
- A Grade: 2.0 or higher
- B Grade: 1.5-1.9
- C Grade: 1.2-1.4
- D Grade: 1.0-1.1
- F Grade: Less than 1.0
Above 1 = you can pay your bills. Above 2 = you have breathing room. Below 1 = you’re insolvent on paper.
Service businesses usually do fine here since you don’t have inventory eating cash. But under 1.5? You need more cushion.
5. Revenue Concentration: Are You Too Dependent on One Client?
This one surprises people. But if one client represents too much of your revenue, you’re sitting on a time bomb.
What percentage of your total revenue comes from your biggest client?
- A Grade: Less than 10% from any single client
- B Grade: 10-15%
- C Grade: 16-20%
- D Grade: 21-25%
- F Grade: More than 25%
Over 25% from one client? That’s not a business. That’s a high-risk job with extra steps.
Losing one client shouldn’t put you out of business.
Calculate Your Overall Grade
Convert each letter to points: A=4, B=3, C=2, D=1, F=0. Add them up and divide by 5.
- 3.5-4.0 = A (Excellent financial health)
- 2.5-3.4 = B (Good financial health)
- 1.5-2.4 = C (Acceptable but needs improvement)
- 0.5-1.4 = D (Poor financial health, immediate action needed)
- 0-0.4 = F (Critical condition)
Most service business owners we work with land between a C and B. Not terrible. Not great either.
What Your Grade Actually Means
A: You’re in rare company. Keep doing what you’re doing. The main challenge is staying disciplined as you grow.
B: Solid. Pick your weakest metric and push it to an A over the next 90 days.
C: Functional but vulnerable. One bad quarter could spiral. Build your cash runway and diversify your clients.
D or F: This isn’t sustainable. Get cash to 30 days minimum. Everything else can wait.
The Problem With Feeling Good
Most service business owners we talk to feel optimistic about their finances. That optimism kills businesses.
71% of business owners say their performance improved in 2025. But over half of them have less than 30 days of cash. They’re celebrating growth while standing on a trapdoor.
The businesses that survive are the ones that look at the numbers without rose-colored glasses.
Grade Yourself Every Month
Put it on your calendar. Same day every month. Calculate these five metrics and track your grade over time.
You’ll catch problems early. Cash runway dropping? You’ll see it before it’s a crisis. Client concentration creeping up? You’ll notice before they walk.
Ready to Find Out Where You Actually Stand?
We built a free Financial Health Assessment that does all the math for you. Takes about 5 minutes. You plug in your numbers, and it calculates your grade across all five metrics, plus gives you a detailed breakdown of where you’re strong and where you’re vulnerable.
Take the Financial Health Assessment here
Once you see your grade, you’ll know exactly what needs attention. Maybe your cash runway is solid, but your client concentration is scary. Maybe your margins look good, but nobody’s actually paying you on time.
If your grade isn’t where you want it (and let’s be honest, most businesses are sitting at a C or low B), we can help you fix it. We track these five metrics every single month with our clients. We catch problems when they’re small. We help you build cash reserves, improve margins, and diversify revenue so you’re not constantly stressed about money.
That consulting firm from the beginning of this article?
They’re sitting at an A now. It took six months of focused work, but they went from 18 days of cash to 120 days. They sleep better. You probably would too.
Let’s talk if you want help moving your grade from where it is to where it should be.
Until next time!
Common Questions
What is what’s still 100% deductible?
You can still write off the full cost of certain meals, and these are worth prioritizing in your budget.
What is what’s 50% deductible?
Most business meals with clients or customers remain 50% deductible, and this is where most small business owners will find their opportunities.
What is what’s not deductible anymore?
Entertainment expenses have been nondeductible since the 2017 Tax Cuts and Jobs Act, and that hasn’t changed. Sporting events, golf outings, theater tickets, and concerts are 100% nondeductible even if there’s a clear business purpose.
How do you Document Everything?
The IRS requires you to keep detailed records for all deductible meals. Missing or incomplete documentation can result in denied deductions, plus tax, penalties, and interest during an audit.
What to Do Before Year-End?
If you’ve been relying on employee meal deductions as part of your tax strategy, now’s the time to reassess your budget and benefits structure.
