Keeping on top of the financial health of a company is vital for all stakeholders. Directors, investors, suppliers and even customers all have a vested interest in how a business is performing and strong financial health builds trust that the company can weather economic storms and deliver value to those involved.
However, many businesses get carried away with the day-to-day running of operations and forget to review their financial health as often as they should. Setting aside time to check that all is in order could be the deciding factor when it comes to catching problems or concerns before they escalate, so you shouldn’t try to cut corners and skip this reflective process. Fortunately, checking the financial health of a company does not have to be a massive undertaking and there are five easy ways to check that your business is in ship shape.
Assess Cash Flow
One of the first things you should do if you are wondering how to check the financial health of your company is to assess its cash flow. Your company might be profitable on paper, but if it has cash flow problems, it could face serious challenges. After all, cash is the lifeblood of any business and ensures that you have money at your disposal to meet existing obligations.
Analyse recent cash flow statements to understand how much cash is generated and used across different areas of the business. Positive cash flow is an instant indicator that the financial health of a company is good as it shows that the core functions of the business are generating enough money to operate sustainably.
Examine Your Income Statement & Balance Sheet
In addition to cash flow statements, the income statement and balance sheet are also fundamental documents that provide useful insights into the financial health of a company.
Income statements provide a snapshot of your company’s revenue, expenses and subsequent profit or loss over a specific period of time. You should look for consistent revenue growth and controlled expenses when checking financial health. Should your expenses chop and change frequently, aim to understand why. Could these one-offs be better managed throughout the financial year to reduce the destabilising impact of sudden large spending?
Don’t forget to check your balance sheet too. Balance sheets detail the company’s assets against its liabilities and equity at any given point in time. Keeping a balance between these things highlights that the business is in a healthy position to meet its obligations on an ongoing basis.
Calculate Current Ratio
Liquidity is another crucial aspect of financial health, essentially measuring how quickly a business can raise cash from its assets and therefore meet short-term financial obligations should it need to.
When checking the financial health of a company, you can measure liquidity by calculating the current ratio. Simply divide the business’ current assets by its current liabilities and you will get your current ratio. A current ratio above 1 indicates that the company has more assets than liabilities which is a positive sign. However, an excessively high ratio may suggest that the business is not using its resources effectively so do apply your understanding of the industry, market conditions, and any growth plans you may have when assessing liquidity.
Consider Efficiency
Though incredibly efficient businesses can still fall down when it comes to key metrics like liquidity and positive cash flow, efficiency is still a key component of financial health. Efficient companies tend to be operating optimally and maximising their return on investments, rather than overstretching resources which can lead to serious financial problems. Should you think your business is not as efficient as it could be, don’t be afraid to scale back and implement measures to improve efficiency.
Speak To A Professional
Lastly, if you are concerned about the financial health of your company or unsure whether you have the skills to check your position, don’t forget that you can always seek the advice of a professional. It’s better to seek help at the first signs of concern rather than waiting until your company is in real financial difficulty. A fresh perspective can also provide you with a professional opinion when it comes to the next steps, additional investments, or business rescue measures.
If you would like to speak to a trusted professional about the financial health of your company, don’t hesitate to get in touch with the team here at Ballard Business Recovery. We will listen to your concerns and help you work through the most suitable strategy to navigate them.
