Running a business is like driving a car, and the car requires servicing in order to continue running. A financial health check is a tune-up for your business. So, it helps you understand your financial position, identifying potential risks, and be in a position to make sound financial decisions. So, it’s really important to be attentive to your financial state, as you can easily lose control and get into debt. Now, let’s go through a basic checklist of what you need to do to evaluate the financial health of your business.
Review Your Financial Statements
Financial statements are the foundation of business, and they reflect the financial health of your business. Moreover, they provide a snapshot of your company’s balance sheet, income statement, and statement of cash flows. Thus, they assist you in evaluating the condition of your business and its solvency. The three key statements to review are:
- Balance Sheet: Illustrates what you possess (assets) or owe (liabilities).
- Income Statement: Emphasizes your income and expenditure for a given period of time.
- Cash Flow Statement: Keeps record of cash inflows and outflows in your business.
Monitor Cash Flow
One of the biggest issues that result in business failure is poor cash flow. So, it’s important to stay on top of it to avoid surprises. Having negative cash flow at the time of expansion is a bad sign. Therefore, review your cash flow regularly to identify patterns. Keep an eye on operating cash flow (money from daily operations). Also, calculate free cash flow (what’s left after major expenses).
Analyze Key Financial Ratios
Financial ratios are similar to your business scorecard. Therefore, these ratios give you a clear idea about the performance of your company. Moreover, they help you quantify your progress according to your goals and benchmarks against other firms or organizations. So, it can be easy to identify where your business is strong or where it needs improvement through the use of ratios. Focus on:
- Liquidity Ratios: Are you able to meet your short-term needs?
- Profitability Ratios: How well are you profiting?
- Solvency Ratios: What is your debt-to-equity ratio?
Here is a detailed guide on these ratios and metrics.
Compare with Industry Benchmarks
Benchmarking reveals where an organization can improve and how it can maintain competitiveness. Every industry includes standards that reveal how companies similar to yours are expected to perform. Thus, comparing your metrics with these standards helps you know your position. Check out the industry average of profit margins, expense ratios, and growth rates and match with yours.
Bottom Line
Performing a financial health check is not only advisable but mandatory for any businessperson. So, when review the financial statements, manage cash, evaluate the financial ratios, resolve the accounts, and compare the results with the industry, it will be easy to maintain the financial stability of the business.
Need professional help?
McKi Bookkeeping is here to simplify your financial management. So, let us take the load off your shoulders so you can focus on growing your business. Contact us today and make your finances stress-free!
