It is rather easy to determine when your small business is doing well and when it is not. When you are operating from behind, you will know. When you are able to make your weekly employee payroll and easily take care of your monthly expenses, it puts a positive light on your financial state. However, are there perceptible levels or discernible distinctions to consistently suggest whether your small business is financially healthy or not? Or are there definitive ways to establish how well your business is doing away from the norm?
There are several ways to do just that, some of which might be fitting to your business than others. When you think about this, you need to also consider the signs to look for that will indicate if your business is in good financial health or the opposite. Let’s take a look.
When you think about profit and loss statement
in any small business, it is important to see a steady revenue increase each month and each year. You don’t need a huge profitability spike, but it should be a stable increase that exemplifies upward movement and a strong outlook financially.
In combination with the revenue increase, you also should have expenses remain flat. Your expenses may increase if you see a significant growth surge in your small business. However, generally, the expense increase should remain in line with the revenue increase. Let’s say you notice a revenue increase of three percent each year, your expenses should not increase more than three percent during the same period.
Even though, your revenue may be increasing, if you invest that money back into your business, you may become cash poor and asset wealthy, which is not a balance to your financial health. A low cash balance or a stagnant cash balance may mean that your business is unsustainable. So, to combat this problem, keep a specific amount of cash in your local bank for business emergencies. This will prevent you from incurring more business debt from unexpected expenses.
Low Debt Ratios
Pay special attention to two of the most significant debt ratios, namely debt-to-equity and debt-to-asset. These are your solvency ratios as a Denver accountant may explain. These formulas or calculations are specific to measuring the amount of money your business owes in comparison to how much the business is actually worth. It is best to keep this number as low as possible. It will be more ideal to maintain good financial health for your business.
When it comes to profitability ratio, you should use one that measures your sales returns and your investment returns. One of the ideal ratios for measuring profitability is your profit margin. This entails a calculation that divides the annual sales into the yearly net profits. Even when making sales, you must ensure that your profit margin remains low. It will depend on a lot of factors such as startup costs and pricing structure. When your profitability ratio is high, you can tell that your business is financially healthy.
To simplify the process of measuring your business’s financial health, review the profit and loss statement and analyze various components of the business. In the end, it will be up to you to decide the importance of your financial health. Don’t wait until it gets bad. Contact the Bloch, Rothman, and Associates
, an accounting firm in Denver with the experience and knowledge of determining the real financial health of your company. Call 303-321-7160
to schedule a free consultation.