Running your own business can be daunting but very rewarding as well. Building a business from the scratch with passion and dedication may result in a lifelong reward. Of course, it is not easy to do because it carries various risks and challenges. That is why planning is a must and you need to do it well using various resources.
The importance of financial health for your company
Your company needs to have good financial health in order to survive and thrive. You need to know how your business is performing. By understanding your own company’s financial health, you have clear picture to make more informed decisions. It also allows you to allocate your company’s resources. Also, you will have to explain and show your business’s financial health to the investors if you are seeking their financial support. Without clear information of the company’s financial health, it is going to be harder to define the return of investment.
Evaluating your business’s financial health
There are many metrics you can use to evaluate the financial health of your business. One of the most common to use is financial statement analysis. So here are things you can do to measure you company’s financial health:
Evaluate the balance sheet
The first thing you have to do to assess your business’s financial health is to look at the balance sheet and make analysis of it. The balance sheet is a statement that shows your company’s financial position at a specific point in time. It provides information of your company’s assets, liabilities, and equity. Each snapshot you analyze on the balance sheet can indicate whether they are short or long-term.
Evaluate the income statement
The income statement will show your company’s financial position and performance over a period. It provides information of expenses, revenue, and profits your company earned. Through the income statement, you will make better analysis about how much revenue is growing over certain period, the gross profit margin for goods sold, how much net profit resulted from the revenue after all expenses, the ability of your company to cover its interest repayments on debt, etc.
Measure cash flow statement
Cash flow statement is what provide you insights into how your company uses its cash during an accounting period. From the statement, you are going to see the sources of cash flow as well as different areas where money was spent. Each areas are categorized into investing, operations, and financing activities. Then, there is information of how it reconciles the beginning and ending cash balance over the period.
Analyze financial ratio
Financial ratios help you make sense of the numbers you see in financial statements so you can determine the overall financial health of your business. Financial ratios fall under several categories you need to analyze including profitability, liquidity, efficiency, solvency, as well as valuation. These should be compared across periods and against competitors so you know if your company is improving or declining. You need a combination of ratios to make sufficient analysis of the overall financial health of your company.