Healthy finances are key to small business success. While it can be hard to find the time to make an accurate diagnosis when youβre caught up in the flurry of the day-to-day, itβs critical. With the end of financial year fast approaching, sit down, clear your schedule, and give your books a thorough once-over. If theyβre in good shape, great. If theyβre under par, itβs time to take action. Follow these five steps to give your business a financial health check.
![Image Alt Text](https://quickbooks.intuit.com/oidam/intuit/sbseg/en_au/blog/images/stock/sbseg-iStock-964828608.jpg)
How to check the financial health of your small business
1. Use financial ratios
How can you tell whether your finances are in good shape if you have nothing to compare them to? This is where financial ratios come in. Work out your own and youβll be able to judge where you sit now compared to where you were in the past, and against businesses in the same economic sector or the broader market.
Here are a few key ratios:
- Liquidity: Current assets Γ· current liabilities
- Solvency: Total liabilities
- Profitability:Β Gross profitΒ Γ· total sales
- Inventory: Average stock x 365 Γ· cost of goods sold (COGS)
- Return on investment: Net profit before tax x 100 Γ· equity
You should be able to find all these figures in your financial records. If yours arenβt in order, then this in itself is a sign of poor financial health. If thatβs the case, then it might be worthwhile considering investing in accounting software such asΒ QuickBooks OnlineΒ to consolidate your financial information.
![Man and woman working at a desk with laptop](https://quickbooks.intuit.com/oidam/intuit/sbseg/en_au/blog/images/stock/sbseg-iStock-969542568.jpg)
2. Carry out a strategic review
Ideally, you should try to update yourΒ business planΒ monthly or quarterly, taking into consideration what you learned in that time or any changes, and applying them to your long-term strategy. However, if you donβt have enough time to perform such a frequent analysis, then a thorough annual review will do.
This can help you identify any oversights or issues that are negatively impacting your businessβs financial health and, armed with this information, change your plan to resolve the issue or improve outcomes. So, take a step back and revisit the basics. Is the current strategy working? Are your business goals and objectives β revenue, profitability, growth β realistic? Have the market or customer needs changed? If so, what new opportunities exist?
3. Take stock of your sales pipeline
Your sales pipeline can tell you a lot about the financial health of your business. How many potential customers are on the list and where are they in the purchasing process? A quick review of this can help you understand which way your future sales are likely to go.
For example, if your pipeline is empty, you could be at risk if you lose some of your current customers or clients. If thatβs the case, youβll need to step up your marketing and sales tactics to bring in new prospects. Conversely, if itβs full, this should indicate future profitability β provided you can close the deal.
4. Go over your cash flow
A small business needs positiveΒ cash flowΒ to stay afloat. Not surprisingly,Β poor cash flowΒ is often cited as one of the top reasons for business failure in Australia. So, if youβre consistently in the negative and struggling to pay the bills each month, itβs a sure sign of trouble. If this is true in your business, you need to rectify it fast. Assess where money is coming in and going out of the business, plan ahead with aΒ cash flow forecast, and apply someΒ cost-saving strategiesΒ to help keep cash reserves under control.
5. Review your debts
Borrowing money is part and parcel of running a small business, but if youβve got too much of the wrong sort of debt, you could be in trouble. If youβve taken out loans to invest back into the business or expand, and youβre comfortably meeting your repayments, then youβre likely in the clear. But, if your business is operating on debt finance with high interest rates, such as credit cards, for most of your day-to-day expenses, then your finances could take a hit.
If that sounds like your business, you might consider consolidating the debt into a single loan with a lower interest rate and monthly repayments. Taking the financial temperature of your business may not be the most exciting task on your to-do list, but itβs an important one. By identifying any issues, you can quickly work to resolve them and set yourself up for a profitable future.
For more advice on managing your finances, check outΒ these resources.
Related Articles
Looking for something else?
Stay up-to-date with the latest small business insights and trends!
Sign up for our quarterly newsletter and receive educational and interesting content straight to your inbox.
Want more? Visit our tools and templates!
![A happy small business owner signing up for the QuickBooks newsletter on laptop](https://quickbooks.intuit.com/oidam/intuit/sbseg/en_au/quickbooks-online/web/image/banners/sbseg-en-au-newsletter-sign-up.jpg)