Categories: Business

The Essential Guide To Assessing Your Business’s Financial Standing

It’s a widely familiar fact that being a business owner (this refers to both small and larger companies) is not a piece of cake due to the fact that there are so many tasks that must be executed on a regular basis.

One of them revolves around your finances, meaning that you as an entrepreneur should dive into your company’s finances just so you can see if you are moving in the right direction and do whatever is possible to make wiser and more informed decisions when it comes to this.

Keep in mind that the financial health of your firm is not crucial only to you but to a lot of people you collaborate with, like investors, consumers, suppliers, workers, and many others. If you would like to know how you can check it properly, then take a look at these beneficial tips below.

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What’s The Situation With The Cash Flow?

Since this topic revolves around money, one of the first steps that you should take is to evaluate your cash flow. Yes, we do know that your business may appear to be successful and lucrative at first glance, however, just because something seemingly looks good, it doesn’t actually mean that that’s the case.

You might be even dealing with some money issues that you’re not aware of. Now, we are not saying that we are right, however, it doesn’t hurt to check this to avoid any potential financial problems.

Furthermore, you should assess recent cash flow statements so you can get a glimpse of how much money you earned in the last couple of days/weeks/months and the amount of money you spent in that period of time.

If you conclude that you have a positive cash flow, then it most likely means that the financial situation of your company is stable and that most integral sectors of your firm are generating a great deal of money.

It’s Time To Calculate Accounting Equations

If this is something that you’ve never done before, then now is a good opportunity to do so. So what can we tell you about the accounting equation and its purpose? Namely, it is frequently utilized to formulate financial statements.

Its main goal is to be sure that every use of capital (referring to assets) stays equal to every source of capital (equity and debt). Moreover, it can be defined as the foundation of the double-entry accounting system. It helps you ensure that all your books stay balanced.

Moving On To The Financial Ratio Analysis

As a business owner, you are probably familiar with the terms gross revenue and net income. Both of these things are very crucial metrics, however, they are not capable of providing you with enough information.

Reviewing relevant financial ratios can help you understand things a lot better. There are several financial ratios that every entrepreneur must comprehend and below, we will include the most crucial ones:

Cash flow to debt – this will show you the amount of your current cash flow that is going toward debt repayment. In order to get the right number, you need to add depreciation and net income and then divide your total debt. If you end up with a number that is less than one, then you are most likely dealing with financial issues, meaning that you are not able to pay all the costs that are linked to your company.
Net profit margin – the first step is to consider your gross income. Once you deduct all your taxes, costs, and interest, the percentage that you remain with is your net profit margin. You will get the exact number by subtracting all your costs from the total revenue and then dividing that number by the total revenue. It’s always a good thing when your net profit margin is relatively high.
Gross margin ratio – this showcases the amount of cash you have left after spending money on goods that your firm sells. In these instances, you should take all your sales and subtract the cost of your products. Once you’re done with it, you should split that number by total sales. If you end up with a low gross margin ratio, then it may mean that you are having difficulties covering your company expenses.

Focus On The Balance Sheet

So what does this sheet represent? Namely, it represents a statement that showcases the financial situation of your business at some point. It will give you a glimpse of your liabilities, assets, and equity.

In addition, liabilities and assets are shown as non-current and current on the balance sheet, concluding if they are long-term or short-term. Short-term assets are those that will most likely turn into money within one year, while the other ones most likely won’t turn into money in that period of time.

Furthermore, this sheet will give you detailed information concerning the financial health of your firm and it normally includes:

Debt your business has relative to equity
How liquid is your company in the short term
The number of assets that are palpable, and the percentage that comes from different financial transactions
How much you’ll need to wait to receive outstanding payments from the consumers and repay your suppliers
How long it will take to sell the inventory that you keep on hand

And Last, But Not Least – The Efficiency

Even though there’s no guarantee that your company is going to be financially successful in the long run if you are currently efficient, this factor still shouldn’t be overlooked because it oftentimes indicates that a particular firm is relatively stable, operates optimally and also maximizes its return on investments, instead of overstretching its resources which can frequently cause numerous financial issues.

If you think that your business is not as effective as it is supposed to be, then you should take the right steps to change things for the better.

As an entrepreneur, you need to constantly pay attention to numerous aspects of your company in order to be sure that it’s running smoothly. One of those critical aspects is financial health, and we honestly hope that you’ll take the necessary steps to assess it.