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 better 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.
Here are the key steps that should be in your financial health checklist:
1. 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 five different kinds of financial ratios that help you determine a variety of factors, including profitability, liquidity, and finance. By working out these figures, you can identify how well your small business has performed in the past couple of months or years. Plus, you can more accurately judge how well your company has done compared to your competitors in the industry.
2. Review your cash flow
Start-ups and SMEs are especially vulnerable to cash flow problems, so it’s crucial that you pay extra attention to this part of your business. Regularly review your monthly financial records. Are you earning more than you’re spending? Are you able to pay your bills on time?
If you find that your expenses are too high, consider implementing creative strategies to reduce costs and save money. It’s also a good idea to conduct a cash flow forecast so you can prepare your funds ahead of time.
3. Monitor invoicing and debt collection process
Another important indicator of business financial health is your ability to collect payments on time from customers. If you know exactly how much you are owed and if you follow an efficient system for following up on these debts, then your business is in the clear.
But if you have too many unpaid invoices and are finding it difficult to contact clients, then you have a potential financial disaster on your hands. In this case, it’s best to turn over these debts to a professional debt collection agency. This way, you can save time and increase chances of successful debt recovery.
4. 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.
5. 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. 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 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? The answers to these questions will help you adjust your targets so your small business can be more productive moving forward.
For more information on evaluating the financial health of your business, call Slater Byrne Recoveries today! Our team of business development managers will help you identify the potential risk areas of your business and implement practical strategies to improve overall performance.