We all know that in order to be successful in any endeavour, it’s important to treat financial planning as a business problem, not just a personal one. After all, your company’s success is tied to its financial health, and most financial problems are often related to your company’s profitability.
While there may be a myriad of reasons why you fail to meet some of your goals, it is never a good idea to neglect your business’s financial health. In this blog post, we will be discussing why it is crucial for you to focus on the financial health of your business.
Why is it important to make your company’s financial health a priority?
Financial health is essentially measuring how financially viable your business is day to day but also over the long term. If there is no process to assess this then most businesses will use their current bank accounts as the starting point. But how quickly can business cash change? Drops in sales with high fixed overheads can quite quickly cause cash difficulties for many businesses.
Whether you’re a startup or a mature company, your company’s ability to grow and thrive depends on its financial health. Every business encounters financial difficulties from time to time, but by incorporating your company’s financials into your day-to-day operations, you can save yourself countless headaches and problems.
What problems can small businesses face without prioritizing their company’s financial health?
Without prioritizing your company’s financial health, you’ll be unable to focus on the long-term vision you have for your company. Wrong decisions can be made if you only focus on what is available today, as investing now can support longer-term growth but you might think ‘I haven’t got enough money but if you invested £2k in month x to start seeing returns 3 months later and you have enough cash to manage the gap, then the investment is worthwhile.
Going back to basics and developing a plan for your company’s finances
In order to develop a plan for your company’s finances, you’ll need to evaluate how you get cash in vs how you spend your cash. As sales rise ultimately so will costs, but it is important to keep track of your cost base as sometimes the cost of growing can outweigh the additional revenue and can actually have a negative impact if not managed correctly.
You should always monitor your overhead costs such as rent, utilities and payroll. Costs generally rise yearly so monitoring movements in these will help you negotiate and constantly review your overall business model.
How do I use my financial health as a gauge for my company?
There are several ratios that a business can use to assess its financial health but a key month on month ratio is Working Capital. This represents a company’s ability to meet its liabilities. To calculate you use current assets less current liabilities but the difficulty can be determining the categories on the balance sheet. Essentially if you have more liabilities than you do debt, you would want to take instant action!
Determining your business financial health will change depending on your business model. If you are making large investments for growth then the cash will be utilized and profits lower, so there is no right or wrong but keeping track is the most important thing as not having an outlook can cause financial difficulties for any business.
What can I do to make sure my company remains financially sound?
The best way for you to ensure that your company’s financials remain on track is by developing a financial plan early on in the game: set goals for yourself and develop strategies for reaching those goals; measure how well you’re doing overtime; and adjust accordingly when things aren’t going as planned. By setting realistic expectations from day one, you’ll have a better of what to track and how to meet set targets.
Frequently Asked Questions
What is financial health?
Financial health is the assessment of the overall financial position of a person or business entity and setting a plan will be the foundation for a stable and secure financial future for your business.
Is positive cash flow always a sign of good financial health?
Yes, positive cash flow can be a sign of good financial health but should be monitored closely as cash flow can change depending on how the business performs over time.