Is your business financially healthy?
Being a business owner can be a roller coaster ride, both emotionally and financially. In a space of 24 hours, you can go through several peaks and troughs. Moments of over confidence followed by self-doubt are not unfamiliar to the entrepreneur. Sound familiar?
Is your business financially healthy?
Our top 5 indicators to determine your business health
If you only keep track of your bank balance you are missing out on a wealth of intelligence that your financial statements provide you with which will help you make informed strategic decisions. You can only improve what you can measure so you need to begin by keeping up to date accounting records. Your goal should be to have a healthy business that can withstand the rough patches. Here are some indicators that you have a healthy business:
1. You have a positive cash flow
We cannot reiterate this enough, Cash is King. If you are able to meet your monthly obligations this is a good indicator your business is liquid. If you also have a growing of surplus cash after these obligations are met, this is also an indicator of positive growth.
2. Your revenue and profitability is growing
If your revenue is showing month on month or year on year growth, you are on the right path. However, your increase in revenue should be coupled with an increase in profitability. If this is not the case this might be an indicator that your revenue model might be flawed or you have taken on more expenses than the business can sustain. The main margins to take note of are your gross profit margin, which looks at how well your company controls the cost of its inventory / manufacturing of its products / cost of providing a service as well as the net profit margin which measures profitability after consideration of all expenses including taxes, interest, and depreciation
3. Your business is liquid
In layman’s terms, this means that your business has enough resources to meet its short term obligations (current ratio). If you carry inventory, a quick ratio looks at how well your business can meet its short-term debt obligations without having to sell any of its inventory to do so. Always be cautious not to carry too much inventory thereby tying up your cash or letting your debtors take too long to pay. Managing this is key to ensuring you maintain a positive cash flow.
4. Your business is efficient
Efficiency gives you insight into the time period it takes for cash to flow through your business. The main indicators worth noting are the inventory turnover which tells you how long it takes to sell your inventory from when you purchase it and the accouns receivable collection period which looks at the average number of ays it takes for your customers to pay for your products or services.
5. Your business is solvent
Does your business have more liabilities than assets? This might be a red flag that if the business suffers from reduced cash flow it might not be able to meet its overall obligations. A solvent company can pay all its liabilities when they fall due as well as not having any threats or legal action from creditors. A company that is insolvent may have cash flow difficulties, more liabilities than assets or be facing creditor pressure. Solvency does not mean the end of the company or immediate liquidation but it is important to re-strategise and take measures to turn this around.
Managing these aspects is a continuing effort of which measuring and tracking your financial performance is the first step in determining the financial health of your business so that you can make continuous efforts to improve your indicators.