From understanding the data from important ratios to knowing how the market will affect business, here are seven answers to the question, “What are the best steps to take when determining the financial health of your company?”
- Calculate Certain Ratios
- Establish Financial Metrics and KPIs
- Examine Your P&L Statements
- Figuring Out Your Cashflow
- Review Your Financial Statements
- Pull in an Outside Expert
- Assess the Impacts of Market Shocks
Calculate Certain Ratios
There are several steps one can take when determining the financial health of a company, but a common approach is to examine the company’s financial statements and calculate certain ratios. For example, analyzing liquidity ratios such as the current ratio or quick ratio can provide insight into a company’s ability to meet its short-term obligations.
Examining profitability ratios such as return on equity or net profit margin can provide insight into a company’s ability to generate profits from its operations. Additionally, examining the company’s debt ratios or leverage ratios can provide insight into the level of debt and its ability to repay its long-term financial obligations.
By examining these key financial metrics, business owners and investors can gain a better understanding of a company’s overall financial health.
Brenton Thomas, CEO, Twibi
Establish Financial Metrics and KPIs
One important step to take when determining the financial health of your company is to establish financial metrics and KPIs to track and measure your progress over time. By defining clear financial objectives and key performance indicators, you can gain valuable insights into your company’s performance and make informed decisions about where to allocate resources and investments.
Some key financial metrics to consider include revenue growth, gross margin, operating expenses, net income, cash flow, and return on investment. By tracking these metrics over time and comparing them to industry benchmarks and your own goals, you can identify areas of strength and weakness in your business and make strategic adjustments to improve your financial performance.
In addition to financial metrics, it’s also important to track non-financial KPIs such as customer acquisition cost, customer retention rate, and employee satisfaction.
Luciano Colos, Founder and CEO, PitchGrade
Examine Your P&L Statements
Profit and loss accounts are the most effective way to examine your company’s financial health. This income statement details a company’s revenues and expenses for a specific time frame.
The report is divided into three sections: revenues, expenses, and profits. Gross profit is calculated by subtracting the cost of goods sold from revenue earned during the period. Since changes over time are more important than raw numbers, comparing profit and loss statements from different accounting periods is essential.
Marco Genaro Palma, Co-founder, TechNews180
Figure Out Your Cashflow
Cash flow is key when it comes to the financial health of your company. Thinking about the long-term revenue of your investments is useful, but to be able to get the results of these long-term efforts, your company needs the cash flow to pay the bills and survive in the long run.
For example, leads could offer a lifetime revenue of $10 on average, and you may be able to get leads at $5. However, that does not mean you have the cash (or delivery capacity) to buy all the leads in the world.
Figuring out your cash flow is often a relatively straightforward case of listing all the cash going in and out at what times.
Mats Claes, Owner and Head Editor, Top Keuken Tips
Review Your Financial Statements
One step to take when determining the financial health of your company is to review your financial statements. Analyzing your profit-and-loss statement, balance sheet, and cash flow statement can provide insight into the current financial health of your company.
Analyzing these statements can help determine whether there is enough liquidity to cover expenses and whether the company is making or losing money.
Scott Orn, Chief Operating Officer, Kruze Consulting
Pull in an Outside Expert
As a small business owner, the financial health of my company is never far from my mind. Once I know all the bookkeeping is in order, I see how reality compares with my previous projections.
I don’t just trust my own judgment. The most important thing I do is to bring in an outside expert. I have an outside CPA or accounting firm look at the data. I’ve always found that having a disinterested party look over my books gives me a much more sober assessment than I can produce on my own. That type of assessment is worth every penny it costs.
Temmo Kinoshita, Co-founder, Lindenwood Marketing
Assess the Impacts of Market Shocks
One of the most crucial steps in evaluating your company’s financial health is assessing the potential impact of market shocks. This includes considering factors such as changes in market prices and demand, fluctuations in exchange rates, instability in interest rates, and other relevant economic forces that can affect profitability and long-term sustainability.
If your business is exposed to any of these market shocks, it’s important to conduct a thorough analysis and identify potential solutions that can help you mitigate the risks. This could include diversifying into new markets, exploring different pricing strategies, or seeking additional financing options.
Nick Rivadeneira, Founder, Racebuilds