4 Ways to Check Up Your Business' Financial Health
Business owners often have the kind of zeal that helps them push through with anything, but while a strong sense of determination and a passion for leading helps build brilliant ideas from the ground up, there’s no denying that one of the most important responsibilities include handling money wisely.
Out of all the hats you have to wear to run a business, learning how to handle your finances can directly make or mar your long-term success. Achieving financial independence is not an easy feat for anyone, though, but it’s crucial to beat the learning curve and stay on top of your financial health to ensure your business can grow smoothly through the years.
Think of it this way: investors often look for key metrics that can point them to golden opportunities in the market, which means your business also needs to look at the crucial factors that can impact your financial status in more ways than one.
Of course, keeping track of the company’s expenses, cash flow, and other financial statements demands a more thorough approach. But defining the factors that affect your profitability and operating efficiency can help you build a solid groundwork for measuring your company’s health.
Why It’s Important to Regularly Conduct a Financial Health Check
A financial check ensures you’re aware of the comings and goings of your business’ finances, which is critical in your sustainability as you move forward. The larger your company grows, the more financial obligations you have to meet, so the trickier it becomes to track your financial health.
Hiring a professional accountant can bridge the gap and take the guesswork out of your monetary affairs, but it helps to understand the driving factors that play pivotal roles in your overall financial soundness. With that in mind, we’re here to explore some of the metrics you should consider when verifying your company’s long-term stability.
Key Financial Factors to Consider When Checking Your Business Health
Factor #1: Cash Flow
No matter the size or industry, every business starts its financial journey with a steady cash flow. After all, you need to make spendings cover your operating expenses and generate returns, which means your money will be moving from different sources and channels. Fortune companies often have steadier cash flows, but start-ups may struggle with more fluctuations.
Staying on top of your cash flow and ensuring it’s positive means you have enough funds to run your day-to-day operations smoothly, but a negative cash flow can become a roadblock that can eventually stop you from being able to progress with your business.
To put it into a simpler context, a positive cash flow is good for your business because more money is entering your business than out of it. Meanwhile, a negative cash flow can be deadly since it indicates that more cash flows out of your business than your earnings.
Working with an accountant can help you understand your cash flow and allocate your budget more efficiently, so you can optimize your finances better and have confidence in where your business is headed.
Factor #2: Financial Ratios
Tracking your cash flow gives you deeper insight into your finances, which allows you to make a forecast that can impact your future financial health. But it’s also important to consider other fundamental aspects of your finances by establishing your financial ratios, which include the following: profitability, liquidity, leverage, and operating/efficiency.
It can be confusing to distinguish the differences between your key financial ratios, but understanding them better can help you analyze your performance as you scale up down the line.
Factor #3: Debt Collection and Invoicing
Your cash flow can take a blow when your customers or clients fail to pay you on time. Of course, it’s a lot harder to tell whether you’re going that road since many businesses think they have a good cash flow when there are plenty of upcoming payments in line. But so long as you still have debts from clients that need collecting, your cash flow is slowly flushing down the drain since you don’t have the funds to cover your needs.
That’s why it’s important to have an accountant to help you set up an efficient debt collection and invoicing system in place, so you can always be aware of any late payments and send follow-ups promptly to keep your cash flow moving positively.
Factor #4: Gross Profit Margin
Every business strives to make a sale, so it’s important to monitor your gross profit margin so you can know what sales need to “break-even” to generate returns for your direct costs and overhead expenditures.
Making sales doesn’t automatically mean you’re making a profit, so calculating your gross profit margin can help identify whether your sales are enough to cover your costs. With that being said, you can determine your gross profit margin with the formula below:
Gross Profit Margin = (Net Sales – Cost of Goods Sold) / Net Sales
The Bottom Line: Paving the Way for Your Success with a Financial Health Check
Striving to make a difference in your industry by offering new ideas to the table may give your business a strong foothold in your market, but it’s your financial health that keeps your heart beating for the long run. That’s why the key to long-term success is achieving financial soundness, but you can only do that if you keep a keen eye on your financial affairs and all the measurements that influence your spendings and earnings.
Managing your finances requires your undivided attention, so it’s not an easy task to squeeze in your piling plate. As a business owner, it’s better to work with professional accountants who can handle the legwork of your finances, so you can focus on doing what you do best: growing your business!
Looking for an accounting service for small businesses? We’re here to help! Get in touch with us today for a free consultation.
