Finance is the life-blood of any form of business that means none of them can survive without its easy flow. There might be times when you notice that your organization’s overall income is on a downward spiral and maintenance is getting difficult.
That calls for a checkup on your business’s financial health. I have enlisted a few questions, the answers to which will help you decipher the fiscal prosperity of your business:
Are your profits good enough?
One of the main objectives of a business is to earn profits. Despite being the primary motive, many businessmen make the amateur mistake of not keeping track of their business’ profits. They simply look at the sales figures and assume that the organization is earning enough income to survive. However, sales, no matter how great, are in no way an indicator of a company’s profit margin.
You need to find out the final profit your business earns after deducting the operating costs. If you notice that there is not a significant margin between profits and costs, you need to make some changes in your business’ workings.
Are debts hurting your business?
It is not uncommon for businesses to borrow some amount from other organizations in order to set up their operations and ultimately make a profit. There are high chances that you too have borrowed money for your business as it went along, in order to facilitate its growth. It is extremely important that you borrow only that amount which your business can repay at the earliest.
Letting debts pile up can create trouble for your business in the future. You need to assess your debts regularly in order to make timely repayments. If this is something in which you don’t want to invest your time in, take help from finance experts and let them handle your debts. However, don’t hire any debt collection agency, go for the best. Make a proper research about the debt collection companies and choose your preferred one.
Are you taking the help of your financial statements?
Financial statements like balance sheet, income statement and cash flow statement are major indicators of your business’ financial health. Make sure that you refer to these financial statements routinely as it will help you to understand your company’s finances better and make necessary changes.
The financial statements will also help you define a budget and keep you within the boundaries of the specified budget for a particular period. If you notice that you’re jumping over the thin line, you can compensate by cutting unnecessary expenses.
Is your net income good enough?
The net income of your business is the amount that is left after subtracting the gross profits your business earns during a particular period by the operating expenses of your business for that same period. Net profit won’t give you a comprehensive knowledge of your company’s financial health but it provides you with insight into one of the most important aspects of the business – how much money are you making?
Net profits are extremely important to keep your business running. These net profits are yours, and your employees’, the main source of income. Plus, you also reinvest the excess profits to boost your growth. So, it is very important that you keep a close watch on your business’ net profits as they are a major factor in helping your business grow.
5. What about your excess inventory?
If your business is based on products rather than services, you need to be extremely careful about your inventory. It is not necessarily good for your business to have an excessive inventory. Often, an excessive inventory is either already obsolete, or is about to become so and signifies reckless spending. On the other hand, a low inventory can also spell trouble for your business. It would put an impression on your customers that you do not have enough resources to create the products that you sell.
It is very important that you keep an inventory that represents the demand for your product and also the cost of production. If your inventory strikes that balance, it would mean that your company is financially healthy.
6. Do you spend a lot on the maintenance of fixed assets?
As we mentioned earlier, it is important that you go through your financial reports. While analyzing these reports, if you see that your business has perhaps spent too much on the purchase, or maintenance of certain assets, make sure that they are affordable and do not put a dent into your finances. Keep only those assets that are making a profit for you directly, or helping in your business’ operations because assets that are not beneficial will symbolize that you are not careful about your expenses.
7. Do you have an emergency fund?
It is important for all businesses to be prepared for any situation. The simplest way to assess your business’ financial health is to check if you have enough savings to help you get out of any financial crisis in the future. If the answer is ‘no’, you need to take a good look into your financial report and cut down on any unnecessary expenses. Use the money you save on these expenses to create an emergency fund.
This will help you in times of trouble and you just might be saved from the potential risk of bankruptcy in the future, who knows?
Now that you know the factors or questions that will determine the financial health of your business, what’s the wait worth for? Analyze the necessary and proceed with your revised plan of action!
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.