Knowing the financial health metrics for your business is essential to keep it from crumbling down. The ability to pay your staffs’ monthly salary is not the only indicator you need to know the financial health of your business. Net income growth, current ratio, quick ratio, and return on the asset are some of the key financial indicators to know where your business stands financially. An accurate financial statement and financial health metrics help you to plan your business strategy and predicts future performance.
Key Financial Metric to Check the Financial Health of your Business
The following are the financial health metric for your businesses to analyze periodically.
1. Profitability metric
The profitability metric is considered one of the important financial health metrics. The profit and loss statement, also known as the income statement, contains the net profit, the gross profit, and the operating profit. The income statement measures the profitability of the business at a given period but it is usually for the period of three years. As a small business owner, you can use online accounting software to determine the profitability of your enterprise. It allows you to compare the profit made in one fiscal year with another. You must note that an increase in sales does not necessarily result in an increase in profit especially if there is a corresponding increase in expenses.
2. Liquidity metric
This is an important metric to determine how your business financial health metric is fairing. The liquidity metric allows you to measure the working capital and the current ratio of your business. In other words, it deals with how much money the business has to be able to deal with current needs. In essence, the liquidity metric has to do with the current asset and current liability of the business. An important current asset is an account receivable while the account payable is a current liability. The current asset must be more than the current liability for a business to be liquid.
3. Leverage metric
The amount of debt a business owes determines how long the business would last. The Leverage metric comes under the financial health metric which gives you an insight into the financial health of your business by considering the amount used by the owner against that of the creditor to finance the business. The debt to equity ratio and the debt to asset ratio are the two most important ratios use in getting the solvency of a business. You must note that the lower the ratio, the better for the survival of your business.
4. Activity metric
Activity metric is all about the management of the business in the financial health metrics. How you use the resources at your disposal would say a lot about the growth of your business. Some activity metrics include inventory turnover, fixed asset turnover, account receivable turnover, average turnover period. Although it is important to stock the inventory, too much inventory ties down the capital needed for growth. Therefore, carrying out activity metric reduce the chance of excess inventory.
5. Growth metric
It is essential to measure whether your business is actually growing or not. The growth of a business is determined by factors such as the increase is in profits, sales revenues, working capital, employees, and customers. However, an increase in all these is bound to result in an increase in the running cost of the business, which is normal as long as the expenses do not exceed income.
To sum up, these metrics do not only show where your business stands but where it is likely to be in a couple of years. Therefore, it is essential to do a regular evaluation of your organization using these metrics to promote its survival. What better way to do it than to use myBooks online accounting software.
How to check the financial health of your company?
If you are a small business owner or an entrepreneur, you should know your company’s financial health. Knowing the clearcut of your company’s financial health will help you more in grow your business organization against your competitors.
As a business owner knowing the financial health metrics and financial statement analysis of your company will not only help you to grow your business but also benefits your business employees. Even though you have some most important financial metrics to look after, you also have the responsibility to analyze your financial statement.
Determining the Financial Health of the Company.
The following are the important financial health statement to analyze for your organization.
1. Cash Flow Statement Analysis
The cash flow statement shows the sources of cash and where the company spent its money over a certain accounting period. It is categorized into investing, financing activities, and operations. A cash flow statement is one of the important factors for determining the financial statement of the company.
How cash flow statement provides your company’s financial health information?
The following are the analysis done with the help of the cash flow statement:
The source of cash for your company
What’s your companies liquidity situation?
How much does your company generate the free cash flow for future operating or assets investment?
2. Income Statement Analysis
The income statement tracks a business’s revenue, expenses, and profits. It can be created for any period such as by month or quarter, or at the end of the year using a trial balance of transactions (starting from any two points). Income statements help you in a long way for measuring the financial health of your company.
How Income statement provides your company’s financial health information?
The following are the analysis done with the help of the income statement.
How much increase in revenue for a certain period of accounting?
How much is the gross profit margin for the sold goods?
Does your business covers repayment interest on the debt?
What percentage of your revenue is left over after you’ve covered all of your expenses?
What portion of the business will go to shareholders, and what portion will be reinvested in the company?
3. Balance Sheet Analysis
The balance sheet is considered as one of the important financial health for your company. The balance sheet expresses the financial position of your company at a specific point in time. It gives you the picture of liabilities, owners’ equity, and assets.
How balance sheet provides your company’s financial health information?
The following are the analysis done with the help of the balance sheet.
How much money do you personally owe versus how much is owed by the rest of the business?
How likely is the business to generate enough cash flow in the next year to meet its short-term expenses?
How many of your assets are tangible and how many come from financial transactions?
How much time do you have to wait to be paid?
How long it takes to sell inventory that’s currently in stock?
4. Financial Ratio Analysis
A financial ratio is a very powerful tool for determining and analyzing your company’s overall financial health. Your company’s financial ratio must be analyzed and compared with your competitors periodically to measure your company’s financial health.
Here follows some of the important financial ratios you should consider – Net profit margin, Gross profit margin, Return on assets (ROA), Return on equity (ROE), Total asset turnover, Inventory turnover, Debt-to-equity ratio, Current ratio, Quick ratio, the Coverage ratio.