A financially healthy business is the first step toward a successful company with a significant market share. Without proper finances, any business will run into supply, employment, and tenancy issues. However, a properly managed budget can open up new expansion opportunities.
Running a business is an incredibly stressful undertaking, and if you’re wondering how your company’s doing, it’s crucial to learn how to assess your company’s fiscal health. Don’t wait until the end of the quarter to determine how your company is performing. Instead, this guide can help you learn how to assess your business’s finances at any time.
Five Steps to Ensure Your Business is Financially Healthy
If you want to keep your business running successfully and bring your product to the world, follow these five steps to ensure the company is financially healthy.
Of course, don’t perform these checks just once. You should continually be checking your finances to ensure that everything proceeds smoothly. Here are five steps to help you do just that.
Review Your Company’s Balance Sheet
Before doing anything else, locate the balance sheet and look at it. If you and your employees have been filling this form out correctly, you’ll be able to quickly tell whether your company is performing excellently or falling behind.
If you’ve never used a balance sheet, you can learn more about the process by looking at the resource provided here (https://getdivvy.com/). This tool is crucial for proper financial planning, especially for a small business in its early stages.
Once you’ve reviewed your company’s balance sheet, you’ll be able to analyze your financial health, what is going well, and what needs to change. However, there are some other steps to complete before making any changes to your budget or financial plan for the upcoming year.
Look at Your Company’s Income
Your company’s inbound money is an excellent place to start when looking at financial health. Even if you know that this amount exceeds what you spend, it’s vital to keep close tabs on how much money you make and what is considered income.
Not everything that the company makes is considered profit. After all, some of it has to pay salaries, utilities for the office, and supplies needed to provide your goods and services. These things take away from your gross income and are considered overhead.
Once you look at the amount of money your company makes each month, you can consider slow periods and busy times.
If there are certain times of the year that your product is in demand, average that out with the months that business gets slow. Then, you’ll be able to use the surplus amounts to help you in times of scarcity.
Check Your Company’s Output
Output isn’t just about how much you do each month, although that is a part of it. For example, if you have a high income but only perform one or two services a month, you need to increase your marketing budget to attract more customers.
However, the output is also about how much cash you spend every period. In the beginning months of a business, this amount will likely be higher as you’re buying supplies and necessities for the first time. Then, as you settle into a routine and get to know your schedule, it will be easier to account for what you spend.
Count up all your overhead, including taxes, fees, and other regular expenses. You should consider one-time costs, but the fact that they aren’t repeated should be taken into account. Once all the data is ready, you’ll be able to move on to the next step.
Analyze Your Company’s Financial Ratios
When you completely count all that you make and all that you spend, you’ll be able to analyze these amounts for a financial ratio. This step is crucial and will tell you how healthy your business is.
It might seem oversimplified, but the easiest way to tell whether your company is making or losing money is to compare the output to the input.
Do you spend more money than you earn? If you make more, how much more? Is the profit margin large enough to make it worthwhile, or should you increase it by cutting costs or raising prices?
There are many different business and economic terms you could use here (such as return on equity, gross profit margin, and so on).
However, to keep it simple, consider this ratio: the net profit margin. Overcomplicating thing is a common mistake among first-time business owners.
Net profit is how much money you make after all the expenses are covered, including salaries, taxes, utilities, and supplies. Once you have an average net profit number, you can work with it to see how healthy your company’s finances are and if there are any areas where you can improve.
Make a Plan to Improve Finances
Of course, knowing how well you’re doing isn’t enough, even if your company is doing well. It’s crucial to keep improving and growing as a business.
The goal is always to grow, reach more people, and attain a higher net profit every year. As you grow, you’ll have to continue checking your company’s financial health.
However, if your company is in the red, it’s time to take drastic action. Maybe you need to liquidate some assets to make ends meet this month or move more services online to save on office space. Your business needs a unique solution based on your products and services.
Knowing your financial health is the first step towards a long and lucrative life as a company. Do what you must to survive, and you will eventually be able to thrive in an increasingly competitive market.
Once you’ve made a plan for increased financial security, everything else will settle into place.
The business that keeps a strict financial schedule is the business that lasts. Most businesses fail because of unexpected financial strain, not because they had poor products or didn’t market well.
If you want to last longer than the average company, ensure that you build your company on a solid financial footing. If everything is in the green, you will watch your company grow in stability and success.