One of the most vital skills a business owner should have is determining the financial health of their business. Having an understanding of the business’ financial health can give a clear direction for the organization in creating decisions and allocating resources. In the long run, investors would also be curious of this information.
Here are the things you have to check in in order to determine your business’ financial health:
1. Balance Sheet
A balance sheet is a financial statement that shows an organization's "book value," which is determined by subtracting all the company's liabilities and shareholder equity from its total assets.
It will help the company determine its liquidity whether it would be able to pay back its liabilities with its assets or is it capable of availing more financing through debt. Additionally, it would help you determine what kind of assets you have and reevaluate how to utilize them. This includes analysis on the length of selling inventory and receiving accounts receivable. Then, it also determines crucial metrics that affect the company’s operations like the percentage of tangible assets versus assets sourced from financial transactions and the percentage of debt in relation to equity.
2. Income Statement
An income statement is a financial statement that details the revenue and expenses of a firm. It also displays whether a business is profitable or not over a specific period.
This financial statement would provide information on how much revenue the company is gaining per period in relation to the cost of the service or goods sold. Thus, reevaluating if the company is growing in a favorable pace, or changes in raw materials and other costs must be done, or more marketing efforts must be pursued. Also, it helps the business owner determine how much money the business can allow to flow out. It examines if the business is capable of repaying the interest of its debt. While on the other hand, analyzing how much dividends the company is repaying to its shareholders versus how much it invests back to the company.
3. Cash Flow Statement
A cash flow statement is a financial statement that summarizes all cash inflows a company receives from its continuing operations as well as from external investment sources. It also includes all cash outflows for business and investing operations throughout a certain period.
It provides the business owner a visual representation of the cash inflows and outflows of the company, which shows whether the company has enough cash to continue the business operations. In addition, it also details the company’s sources of cash and which sources it gets the most and least cash inflow. This helps the company decide whether it needs new sources and which assets or operations the company must invest and reinvest in. Overall, it shows the business owner if the cash of the company has decreased or increased. This leads the business owner to decide what is the next step for the company.
4. Financial Ratios
The numbers provided by the balance sheet, income statement and cash flow statement might be overwhelming especially for people who get scared of numbers. Thus, it would be more helpful to utilize financial ratios in analyzing the financial health of the company further. There are various categories of ratios like profitability, liquidity, solvency, efficiency, and valuation.
These ratios must be used in comparison across the past periods of the company and industry competitors to determine where the business lies in terms of its growth internally and externally. Utilizing one ratio might not lead to viewing the bigger picture. It is recommended to use it with other financial ratios as well.
Realizing you need help with the financial health of your business? Ask your consultant! Reach out to us through: info@greenpointconsultancy.com
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