Knowing how to assess a business’s financial health and performance is an important skill. A comprehensive view of your business’s financial health may help you make better decisions regarding its future to efficiently allocate your resources. You must address your company’s financial health to seek financing or attract investors. Below are four ways you can measure your small business’s financial health.
1. Review your business sheet
Your organisation’s balance sheet has useful information regarding its financial situation at any given time. It shows the company’s liabilities, assets, and owner’s equity. In this context, assets relate to what your company uses for commercial operations and are equal to the sum of the owner’s equity and the liabilities. Liabilities are any repayable cash owed, and owner’s equity refers to how much money you have invested. Analysing your balance can give you a good idea of your business’s financial health since it illustrates how long it will take to use your business’s on-hand inventory, your existing debts to the equity, physical assets, and so on.
2. Measure liquidity
According to a recent study, around 500,000 UK small businesses are at risk of closure due to the increasing cost of business. However, establishments that can quickly convert their assets into cash have a better chance of survival. The more liquid your assets are, the faster you can use them to cover your liabilities. As a general rule, the greater your business liquidity, the easier it is to overcome cash flow issues and other financial obstacles. Also, acquiring loans and capitalising on opportunities to boost operational efficiency is easier.
3. Review your cash flow
Cash flow is a key statistic for determining your company’s health. It can reveal whether your business revenues and expenditures are balanced. The cash flow statement, for instance, shows how much cash you have available to your business. Poor cash flow suggests difficult times for paying workers, creditors, suppliers, and so on. Assessing it ahead of time might assist in taking preventive measures to avert a disaster. It may also prompt you to seek financial support to preserve cash flow and make consistent payments.
4. Analyse your financial ratios
Financial ratios are useful for understanding the numbers in financial statements. They are strong instruments for analysing your business’s overall financial health. Ratios are classified into several types: profitability, solvency, liquidity, value, and efficiency. Compare financial ratios over time and compare it to your rivals to determine if your business is improving or falling behind. However, no single financial ratio is enough to assess your business’s overall financial health so apply a mix of ratio analyses for a much clearer view. You need some financial knowledge to measure your business finances. And a little reading and real-world practice reviewing financial data can give you a basic understanding of the principles. However, it may be helpful to use reporting and analysis solutions like Cognos Analytics Licencing to make the most of your financial data.