Measuring your company’s financial health involves quite a bit more than simply looking at your balance sheets in your accounting software and analyzing the profits to loss ratio. But taking the time to determine your business’s overall financial stability is important in determining what choices you should make and how to improve your company for the long run.
Continue reading for a few tips that will help you measure the financial health of your business easily.
Know the Factors of a Healthy Business
All businesses that are financially sound have a few of the same things in common, and knowing what these factors are can help you when it comes to recognizing if your company is healthy or not.
For example, as the owner of a financially stable company, you have a clear understanding of where your money is going, particularly when it comes to things like equipment leases. Also, a healthy business has already been able to secure a good amount of credit from a bank that has deemed the company trustworthy and responsible. If your business needs help with establishing credit, it’s a good idea to work with a business credit builder. And, finally, a business that’s financially healthy will have a separate account for payroll expenses, and will also develop and maintain a budget.
Look at Your Balance Sheet Ratios
There are a variety of different types of balance sheet ratios you can use in order to determine the financial health of your organization at any point. These will give you a clear picture of where your company stands so you can make necessary changes to get your business back on track.
For example, you can analyze your debt to equity ratio, your current assets versus your current liabilities, your turnover ratios for things like inventory or accounts receivable, your inventory to sales ratio, and more. All of these ratios will give you a better idea of where improvements can be made and whether or not your company is strong in any particular area, whether it is sales, assets, inventory, etc.
Calculate Your Business’s Solvency
One of the most important things you need to calculate when you’re determining and measuring your company’s financial health is its solvency, or the number of months that it can actually remain in business before hitting bankruptcy if all of your sales stopped and your customers stopped paying you. Although hitting rock bottom isn’t something that any business owner wants to think about, this is really the ideal way to determine just how financially successful you really are, as you may be surprised by the results of your calculation.
In order to accurately determine the solvency of your business, divide the amount of cash that you have in the bank by your monthly expenses. This will give you the number of months that you’d be able to continue operating before having to file for bankruptcy.
These are just a few of the ways that you should be measuring your company’s financial health to figure out just how strong it really is. Doing so will give you a clearer picture and guide you as an owner.
