How To Keep Your Business Financially Healthy
You’d think that having steady sales and a bank balance would automatically mean that your small business is financially healthy. But that’s a faulty assumption that too many small business owners make as they’re growing their companies.
Ideally, you have an accountant to help you manage the financial side of your business, including tax planning. But even with a financial professional in place, you, as the owner, need to become financially savvy enough to understand what financial health for your business really means. You also need to be able to constantly evaluate your business’s financial position and to be able spot the signs if your financial health is slipping.
But if you don’t relish the idea of having to become more financially fluent, don’t despair. D&B says there are five steps you can master:
- Evaluate your business’ end-of-month cash position.
- Your goal is to have more cash at the end of every month. Check every three months to make sure your cash is building.
- Check your business’ solvency.
- In other words, if your sales went away, how long could you stay afloat? Stay on top of your receivables—collect the money you’re owed.
- What portion of your revenue goes to overhead?
- As with solvency, there’s a simple calculation you can use to see how much you’re spending every month to “keep the lights on”—and how those costs are trending against sales.
- Track operational metrics.
- This is a discipline business owners can’t avoid—for example, regularly checking your sales pipeline to see how much revenue you can project, and regularly checking your workflow to see what still needs to be billed. And don’t forget to regularly “check in” on employee morale.
- Think strategically.
- There are additional metrics that will help keep you out in front of your industry. Click the link above to read more.
Like so many other things, there isn’t just one right way to monitor your business’s financial health. Ask your accountant to help you set up a system for streamlining and automating your internal financial checkups. And in the meantime, explore and compare how various experts say you should be doing it. Another take on taking the temperature of your small business's financial health from bizfilings.com. This article echoes some of the D&B insights and adds some new ones. But bizfilings.com also suggests five steps that will keep the “out-of-business bug” away from your business.
Above all, the site says, cover the accounting basics. Practicing the fundamentals like keeping records current and keeping a sales and cash receipts journal need to be done in service of two goals:
- Making sure all your transactions are captured and recorded consistently and promptly.
- Having data at your fingertips to use for analysis and forecasting.
In addition, the other steps include:
- Using liquidity ratios to monitor your liquidity (capital or cash flow against liabilities).
- Knowing how to analyze your P&L statements for important insights into areas like sales growth, attrition and expenses.
- Watching your inventory. Most small businesses err on the side of keeping too much on hand, which drains cash. Using ratios like inventory-to-sales will help you manage at the right level.
- Knowing your debt level. Understanding how much risk you’ve undertaken, as well as using key ratios, like debt-to-equity and debt-to-assets, will help keep your debt at acceptable levels.
While you’re getting accustomed to conducting periodic financial checkups, business coach Sue Smiley says that business owners also need to be aware of signs warning that their business’s financial health could be on the decline. Pay close attention to these:
- Fixed expenses that are rapidly rising
- Policies and procedures that are inconsistent
- Employees that are demoralized and disengaged
- Lack of repeat business
- Problems hiding in the balance sheet (like poor accounts receivable)
You’re on your way to keeping an educated eye on the financial health of your business. You won’t be able to master the process right away, but with patience, monitoring your finances on a regular basis will soon be second nature.
Image courtesy of Vichaya Kiatying-Angsulee / FreeDigitalPhotos.net