The survival of your business highly depends on its financial health. That is why it is important to know the financial health status of your business at any given time.
Understanding where your business stands financially empowers you to make better decisions for the growth of the company. It also helps you anticipate and plan for tough times so you can bounce back unscathed.
In addition, if you want to appeal to investors, your business’s financial health will be an area of interest to them. In this article, we discuss some steps that you can take to determine and ensure that your business stays healthy financially.
1. Analyze Your Financial Statements Regularly
Maintaining proper financial records and preparing financial statements is an important aspect of any business’s financial management. This includes the balance sheet, income statement, and cash flow statement. Besides preparing them, it is important to analyze them in detail on a regular basis.
These statements provide valuable financial insights that aid in better decision-making. For instance, the cash flow statement provides information on how cash was generated and used over a certain period. Analyzing the cash flow statement can help determine the liquidity of the business. It also makes it easy to identify free cash that can be directed to other areas to generate more income or invest in assets.
2. Calculate Financial Ratios
Financial ratios help you see where your business is standing financially. You can use financial ratios to gain insights into how your business is doing. This helps identify areas that you need to improve to ensure better financial standing. Some of the ratios that you can calculate include:
- Quick ratio – This allows you to determine if your business has enough assets and cash to operate
- Current ratio – This tells you if your business is able to pay short-term liabilities
- Debt to equity ratio – This ratio helps you determine how you are financing growth
3. Manage Your Cash Flow
Your cash flow is the lifeblood of your business. It means the money that is flowing in and out of your business. If you are to ensure a healthy financial situation, maintaining a positive cash flow is vital.
This means ensuring that the money coming in is more than money moving out. A positive cash flow shows that you have enough money to cater to your business cash needs such as paying for expenses, paying loans, and buying equipment among others.
Some of the ways you can manage your cash flow are to find ways to speed up debt collections. You can also negotiate better repayment terms with your creditors. Also, anticipate future cash needs and borrow money in advance. In addition, invest in tools that simplify your cash flow management.
For instance, an online business bank account provides a way to monitor your cash flow in real time. Businesses are shifting from traditional banking to modern business banking alternatives such as Novo since they are cheaper and provide a way to monitor transactions. This makes it easy to detect irregularities early and solve them in time.
4. Conduct Regular Internal Audits
The purpose of auditing the books of accounts is to ensure the credibility of your financial statements. Auditing the books allows you to catch discrepancies to make sure that the statements are accurate.
How does that help the financial health of your business?
Well, making decisions based on inaccurate information can jeopardize the financial health of your business. Take for instance where you pay taxes based on inaccurate information. It is likely that you end up paying fines and penalties when the discrepancy is identified in the future. Unfortunately, that can hurt your finances significantly.
5. Have a Budget in Place
A budget allows you to estimate the income and expenses of your business over a particular accounting period. It acts as a guideline to avoid overspending on expenses, which improves your finances.
In addition, a budget shows the money that you need to cover expenses and maintain operations for that particular period. This helps you set goals and put in measures to generate the anticipated income.
In a way, it helps improve performance to meet financial goals. Moreover, with a budget in place, you can be able to plan for major financial needs without interfering with your short-term financial health.
6. Key Performance Indicators (KPIs)
Key Performance Indicators (KPIs) are measurable metrics that businesses use to evaluate their progress toward achieving their objectives. KPIs can be financial or non-financial and can vary depending on the industry and business goals. Examples of financial KPIs include revenue, profit margin, ROI, and cash flow, while non-financial KPIs can measure areas like customer satisfaction, employee engagement, and operational efficiency.
To be effective, KPIs should be SMART – Specific, Measurable, Achievable, Relevant, and Time-bound. This means that KPIs should be clearly defined, quantifiable, attainable within a specific time period, directly relevant to business objectives, and measurable using data.
Regularly monitoring and analyzing KPIs is crucial for businesses to identify trends and patterns, and to make informed decisions for improving performance. By tracking KPIs, businesses can identify areas for improvement and take corrective action to achieve their goals.
In summary, KPIs are essential for businesses to measure their progress and ensure they are on track toward achieving their goals. By selecting appropriate KPIs, setting realistic targets, and regularly monitoring performance, businesses can improve their overall performance and achieve long-term success.
One of the ways that improve your success in business is to have an understanding of how your business is performing financially. Knowing the financial health of your business means that you can make informed decisions to steer your business forward.
Some of the ways to determine the financial health of your business are to analyze the financial statements and calculate financial ratios. In addition, operate with a budget, manage your cash flow, and conduct internal audits to improve your financial management.