The Financial Health Checklist for Every Small Business Owner

Making a financial health checklist to know the status of your business will allow you to make informed financial decisions so you can better allocate resources for your business to operate with a positive cash flow.

Regularly evaluating the financial health of your company is one of the best business practices you can implement. This process not only allows you to determine whether your account books are in good order but also helps keep you on track and allows you to make informed financial decisions.

If you are not implementing this practice yet, now is a great time to start! After all, the end of the year is fast approaching, and you’ll want to make sure your small business starts off the new year on the right foot.

The Financial Health Checklist Every Small Business Owner Needs

Here are the key steps that should be in your financial health checklist:

Work out your financial ratios.

First things first, you need to have a point of comparison to determine whether your business is in good financial health. You can do this with the help of financial ratios. Also referred to as accounting ratios, these are a set of calculations that use the financial data to determine the commercial performance of a business.

There are different kinds of financial ratios, including the five most important ones below, that help you determine a variety of factors, including profitability, liquidity, and finance:

  • Gross profit margin
  • Net profit margin
  • Debt-to-equity ratio
  • Return on equity (ROE)
  • Return on assets

By working out these figures, you can identify how well your small business has performed in the past couple of months or years. It is important to compare the different financial ratios across different periods (e.g., quarterly, or annually) to check whether they are improving. Plus, you can more accurately judge how well your company has done compared to your competitors in the industry.

Financial ratios help you make sense of the numbers presented in financial statements. They are also powerful tools for determining the overall financial health of your company. Ratios fall under a variety of categories, including profitability, liquidity, solvency, efficiency, and valuation.

Review your cash flow.

Start-ups and SMEs are especially vulnerable to cash flow problems, so you must pay extra attention to this part of your business. Regularly review your monthly financial records, especially your cash flow statement.

Are you earning more than you’re spending? Are you able to pay your bills on time? The cash flow statement is an important financial document that you can use to analyze your company’s finances. Among other things, the cash flow statement will capture:

If you find that your expenses are too high, consider implementing creative strategies to cut business costs and save money. It’s also a good idea to follow these steps to secure your company’s cash flow so you can prepare your funds ahead of time.

Improve your debt collection process.

Another important indicator of business financial health is your ability to collect payments on time from customers. Delayed payment terms are a perpetual problem, especially in the building and construction industry in Australia.

If you take the steps to improve the debt management of your business, then your business is in the clear. One way to improve your debt management system is to prioritize debt payments. Another step is to invest in a debt management software to efficiently follow up on unpaid debts.

But if you have too many unpaid invoices and difficult clients, then you have a potential financial disaster on your hands. It is always a best practice to act immediately when your list of difficult debtors starts to build up. When this happens, it’s best to outsource your debt collection to a professional debt collection agency so they can create a debt collection strategy that fits your business needs.

It is also worth noting that some debt collectors are knowledgeable on the latest government regulations. They can help you craft out-of-the-box solutions to your debt recovery problems. By engaging a debt collection agency, you can save time and increase the chances of successful debt recovery.

Evaluate your sales pipeline.

A quick review of your sales pipeline can tell you a lot about the financial health of your small business. How many potential clients are currently on your list and how far along are they in the purchasing process?

Regularly reviewing your sales pipeline will give you a good idea of which direction your future sales are likely to go. You can use this information to adjust and improve your strategies so you can achieve your goals. It is also a best practice to review your sales and customer service, such as your ability to meet the demands of your customers.

It is also helpful to determine your new clients and your repeat customers. These two groups will require different customer care treatment but when you cultivate your relationships with your customer groups accordingly, the returns on investment to your business may be even greater.

Conduct a strategic review.

Taking the financial temperature of your SME does not only mean looking at the account books. It also means reviewing and updating your business plan, including your hiring and human resource strategy. This will allow you to pinpoint any issues or oversights that have negatively affected your company’s financial health.

When conducting a strategic review, ask questions like: Are your financial goals concerning revenue, profitability, and growth still realistic? Have the needs of the market or consumers changed? Are there any new opportunities you can take advantage of? It is also important to consider the current economic landscape when conducting the strategic review. You can’t complete a strategic review without looking into the impact of the government-imposed lockdowns on your business.

The answers to these questions will help you adjust your targets so your small business can be more productive moving forward.

How does a financial health checklist improve your business?

Now that you are equipped with the financial health checklist, how can you turn the insights that you’ve gained into measurable actions? For business owners, knowing your company’s financial situation will help you when you aim to seek financings such as bank loans or alternative financing through crowdsourcing. Your role as a business owner is to steer your company in a direction that will maintain cash flow and see profits in the near term.

Slater Byrne Recoveries recommends a regular evaluation of the financial health of your business to avoid a cash flow crunch – or worse, insolvency. Our team suggests identifying the potential risk areas of your business and implementing practical strategies to improve overall performance.

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