5 Strategies to Improve Financial Health
Now that you’ve set up your business plan, set everything in place, and begun business operations, it’s time to start strategizing to ensure the success of your company.
- Set your goals and objectives and PLAN to exceed them
- Have CASH Reserves
- ANALYZE your finances Monthly, Quarterly, Bi-Annually, and Annually
- Quick Ratio – To assess your operating ability
- Debt/Equity Ratios – Assess growth source – debt or income?
- Current Ratio – Assess ability to pay back its short-term liabilities
- Days Sales Outstanding – Assess liquidity of receivables
- Days Inventory Outstanding (DIO) – Assess movement of product
- Review Your Goals
- Prepare for Growth and Unexpected Events
✔ Assess and pinpoint you and the business current and future strengths and weaknesses
✔ Assess what needs to happen for your business to succeed, such as revenue targets to meet or acquiring new clients
➪ Set your one-year plan, three-year plan, and if you can find time, you should design your five and ten-year plan
➪ If you’re starting your own business, it’s best to have six months of reserves.
✔ Analyze your personal budget and evaluate what your monthly expenses are. Your reserve of cash should cover these expenses during a slow period. Continue to think ahead and evaluate your budget to stay on top of your company’s financial health.
At the most basic level, you need three financial statements to assess your financial health: a balance sheet, cash flow statement, and profit and loss statement. Please see our article, “Understanding Your Financial Statements” for more information.
➪ Customize your profit and loss statement to sort by month, so that you can identify any changes from one month to another
Just like your annual physical at the doctor,
Your company deserves an annual financial health check
Use Financial Health Ratios to Analyze
Objectively assess your financial health using the most common financial ratios:
Quick Ratio = (Current Assets-Inventories) / Current Liabilities
Total Debt/Equity Ratio = Total Liabilities / Shareholders Equity
➪ A high result means your business has been growing due to debt. But, remember – not all debt is bad. If the result is really high, your business has to pay off loans and interest payments
Current Ratio = Current Assets / Current Liabilities
➪ If the result is less than 1, that’s a warning sign as to whether your company is able to pay its short-term obligations. It doesn’t necessarily mean your company will go bankrupt, but it’s something worth keeping tabs on.
Days Sales Outstanding = (Receivables / Revenue) x 365
➪ You want to see a low number here – this means it takes your company fewer days to collect your accounts receivables.
Days Inventory Outstanding = (Inventory / COGS) x 365
➪ Compare your company to your competitors with this ratio
✔ Did you meet all the goals you outlined in your one-year business plan?
✔ Are your action items are being addressed along the way?
✔ With your financial goals and projections in mind, are you prepared for your projected growth?
- Will you need more employees to handle your new plans, projects and expanded growth?
- Will you need to plan to implement a new software system?
➪ Growth may occur before you know it, so be prepared to run with it with success!
✔ To make sure all of your hard work doesn’t go to waste, it’s important to plan for life’s unexpected events.
- Develop a plan for financial hardship, injury, or disability.
- Plan for a possible future succession or transfer of ownership of your company
While an annual physical at the doctor is recommended, so is seeking care when you need it. Annual and monthly financial statement analysis is necessary to review your company’s financial health. However, if you think your company’s finances need attention at any time, seek our help at Profit Source Advanced Bookkeeping to evaluate your business’s financial health using our tips, strategies, ratios, and checks.
Article by Karen Todd,
Senior Financial Analyst ~ Accredited Business Advisor
Profit Source Advanced Bookkeeping