4 Ways for Small Businesses to Check on Financial Health
For small businesses, having healthy finances is crucial to the growth of your company. Knowing the financial state of your business will save you from making bad business decisions in the long run. Plus, it is always a good idea to keep up to date with the state of your finances.
Doing this regularly will help you a lot in the long run. If you want to try it for yourself, there are many ways in which you can. Here are just some of the different ways to check how you are doing financially.
1. Perform a Strategic Review
It is recommended for any business to update their business plan monthly or quarterly. It is important to develop strategies and update existing ones as you go along. Having a regular review will help you identify what is not working and what you can improve upon and modify the business plan based on the results.
Not only is this good for developing strategies, but it can also help you assess your financial health. If you are experiencing a decline in financial health, then a review will help you pinpoint problem areas and address them.
2. Be Knowledgeable About Your Sales Pipeline
Your sales pipeline will usually give you a good indication of your customer base and the potential sales you could make. However, if you have a bare pipeline, this could mean that you are not in great financial health.
Your pipeline should have a list of potential customers and the status of their purchases. Having a bare pipeline might indicate that you are not utilising your marketing and sales resources well enough to garner more profit.
3. Look Through Your Debts
While maintaining a small business, it’s often unavoidable to borrow money from lenders to fund your expenditures. As long as you are able to keep track of debts and allocate money from the budget to pay them off regularly, you should be fine. However, if upon assessment you realise that you have accumulated a bit too much, then that spells bad news for you.
It is often necessary to take on loans so that you can invest more into the business, but if you are looking at high debt, then you might want to reassess your financial situation. If possible, try consolidating your debt into a single loan.
4. Make Use of Financial Ratios
If you are having a hard time starting your financial assessment, why not try financial ratios? This is a personalised, formulaic method of comparing your finances to similar industries in the market.
There are some ratios that you can calculate to assess this. For instance, you can calculate liquidity by dividing your current assets from your current liabilities. For solvency, you simply need to total all of your liabilities.
Your profitability is calculated by dividing your gross profit from your total sales. For ROI, multiply your net profit before tax by 100 and divide by the equity.
Taking the time to assess your financial health may not be the most exciting part of the business, but it is one of the most crucial aspects. By getting an overview of your finances, you will be able to formulate smarter business strategies.
For a holistic financial assessment, talk to an accountant in the Gold Coast. At New Wave Accounting, we provide end-to-end accounting and bookkeeping services to help you stay on top of your financial health. Consult with us today!