Nathan Bransford did a You Tell Me post in June on How Do You Know When Your Novel is Really Finished? The discussion that ensued was very interesting.
My friend, TS, asks me this all the time about picture books.
TS: How do I know when to submit?
ME: You submit when you think its as good as it can get.
TS: But isn't there always room for improvement?
ME: Yes, I guess. Okay, you submit when you think it's at a point where it is irresistible.
I think submitting too soon is one of the biggest mistakes that new writers make. I know I did it with my first two PB manuscripts.
When I submitted HOP PLOP (my fourth manuscript, but my third submission), it had been through critique groups and it had been revised many times. I couldn't imagine how anyone could read it and not fall in love with it. That's when you know you have a winner.
I read somewhere once a long time ago that if you drop it in the mail and walk away with a huge smile on your face, then it is ready.
I think that pretty much says it all.