Business financial health describes the state of one’s business ( also personal) financial situation. There are many dimensions to it; including the amount of savings you have, how much you are setting away for retirement and how much of your income you are spending on fixed/investments or non-discretionary expenses.
To assess the financial health of a company, certain factors are considered under review; which include but not limited to;
1. Revenue Growth.
2. Flat rate Expenses.
3. The impact of Cash balance
4. Your Debt Ratios Should Be Low. …
5. Healthy Profitability Ratio
6. Your Activity Ratios Are In-Line.
You should be able to determine if your business is doing well with ease. It does not go without saying that you make your monthly payrolls, bills and other business expenses; but there are discernible ways that reliably signify a good or bad financial health of your business. like Dave Ramsey would say; ” A budget is telling your money where to go instead of wondering where it went”, effective business plan is a good business aid.
1. REVENUE GROWTH
Income statement/Profit or Loss Statement which shows periodic financial performance of a business should be able to portray a pretty steady growth in your revenue monthly or yearly. This could be huge split in profitability that indicates a strong financial health and upward movements.
2. FLAT RATE EXPENSES
You want your expenses to stay flat in line with your revenue growth. If your business experiences a significant growth in revenue, then your expenses may also rise, but this increase should be in-line with your increase in revenue. So if your revenue is increasing 3% year over year, you’d want your expenses to increase no more than 3% during the same period.
3. THE IMPACT OF CASH BALANCE
Your Cash Balance Demonstrates Positive Long-Term Growth
While you may be increasing your revenue, if you’re taking that money and simply investing it back into the business, you might find yourself asset rich and cash poor.
A low or stagnant cash balance means your business is not sustainable and cannot meet its obligations. You want to keep a healthy amount of cash in the bank so that if anything urgent comes up, you aren’t in a position of having to incur more debt to meet an unexpected expense.
4. YOUR DEBT RATIO SHOULD BE LOW
There are two debt ratios to pay particular attention to: a business’ debt-to-asset ratio and its debt-to-equity ratio. Also referred to as solvency ratios, these formulas specifically measure how much your business owes versus how much your business is worth. As with most ratios, a lower number is ideal, and for debt-to-asset ratios, maintaining a 2:1 ratio or lower is preferable.
5. HEALTHY PROFITABILITY RATIO
There are a handful of profitability ratios that measure the return on your sales and investments. One of the best ratios to measure is your profit margin. This involves taking your annual net profits and dividing it by your annual sales. So while you may be making sales, your profit margin could still be low depending on your pricing structure, startup costs or other factors. Your profitability ratio is considered healthy when it’s on the high side.
6. YOUR ACTIVITY RATIO ARE IN LINE
There are a few different activity ratios that measure how your business manages its assets. Three of the most common are:
Asset Turnover: This formula takes your sales and divides it by your assets. A high turnover ratio translates to more efficient asset management.
Inventory Turnover: This formula is your cost of sales divided by your average inventory. A high inventory turnover ratio means you’re efficiently managing your inventory.
Operating Expense Ratio: For this formula, take your operating expenses divided by total revenue. This measures how much you spend in order to generate revenue. In this instance, a lower ratio shows efficiency.
Finally, You’re Working With New Clients and Repeat Customers.
The cost to acquire new clients is higher than the cost to work with the same customers over and over again. A steady stream of new clients and repeat customers demonstrates that your business has multiple options for generating revenue. By having access to new customers, you can help to insulate your business from changing attitudes and buying patterns.
Measuring the health of your business’ finances can be as simple as reviewing a profit-and-loss statement or as complicated as analyzing all the different elements of your business. However, there is very little doubt that fully understanding your business’ finances is a sure way to remain.
Ref: Quickbooks intuit (Accounting Software also good for your business)
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