Why It’s Important to Evaluate Your Company’s Financial Health
Dynamic, fast-growing companies must adopt financial management solutions that can quickly adapt to their changing needs. Keeping tabs on your company’s financial health is important in order to help reduce costs, make smarter business moves, and to continue to grow.
Regular Checkups are Necessary
In the midst of operating your business, owners may forget to step back and take stock of their company’s financial health. If you check in on your company’s financial health regularly, there won’t be any surprises!
Have no fear – regular checkups are not complicated. Basic ratio analysis will get the job done by evaluating your finances, identifying potential issues, and determining whether your company is heading towards financial freedom…or a cash-flow crisis.
You may be asking yourself: what should I measure?
You should measure liquidity. Cash flow is the most important factor in operating a profitable company. You should constantly know what your current ratio is (your assets divided by your liabilities). The result of the ratio should be a number 1 or more.
Understand Your Company’s Financial Health
Running a company without understanding its financials is like driving on the freeway with your eyes closed. How can you know where your company’s financial health stands if you don’t look for signs along the way? Understand your financial dashboard, which consists of your net income statement, cash flow statement, and balance sheet.
We recommend investing an hour of your time each week to analyze your income statement and cash flow statement in order to see how your business can change for the better. Here are some pointers to get you started:
- Net income statement – your gross margin should be at least 30 percent of revenue.
- Cash flow statement – just because your business is showing a profit doesn’t mean it’s not in trouble. Remember, not all revenue translates into cash, either.
- Balance Statement – this will be your best friend. You shouldn’t take out debt or seek funds from investors unless you know how to read your balance sheet. Review the balance sheet every quarter.
Keep Tabs on Your Financial Records
It’s imperative for a business of any size to keep tabs on its financial records. Your hard copies and electronic filings should be well organized and up-to-date. For small businesses constantly thinking strategically, it may be hard to keep up with the constant records.
For small business owners who may not know what to hold onto in terms of financial record keeping and for how long, we recommend documenting your income. Income flowing into your company will generate an invoice or receipt. Enter this into your accounting system and make sure to keep a copy as confirmation! Learn about other financial records you should hold onto.