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3 Key Areas That Help Determine If A Business Is Financially Healthy

By Sean M. Hugo, CPA

Gauging the financial health of a business requires a multitude of considerations, and it is not always a straight-forward answer. The financial health of your business will likely depend on what stage your business is at (whether you have just started or if it is an established business), your assets and liabilities, your cash on hand...just to name a few. 

However, while some of the puzzle of financial health will rest on understanding your business and its unique situation, there are there are three general areas that will give you a good idea of whether or not your business is on track.  Think of these as pieces of a larger puzzle, but they are instrumental in helping you understand if your business is really at the level it needs to be.

1) Revenue

The one aspect of a business that is always first and foremost? Revenue, plain and simple. While the surface of it may look easy to gauge (i.e. more revenue coming in? Yes!) but there is a lot of nuances that goes into determining healthy revenue versus unhealthy business practices.

The first thing to examine? Your expenses. High revenue is great, but if it comes at the cost of high expenses, then you are not left with much. Again, this number will likely depend on the stage of your business, since younger businesses tend to be more expensive but it is integral to keep track of the expenses.

The other aspect to examine in this regard is ratios. A recent article by Quikbooks sheds more light on this, but there are essentially three key ratios that need to remain low for financial health:

  • overall debt ratio
  • debt-to-asset ratio
  • debt-to-equity

These are self-explanatory, but the common thread? Debt. These ratios will help you determine how much you owe versus how much your business is earning and its worth. In most cases, you will want a profit margin that is high, especially in comparison to the rest of your competitors (though that is not true of all industries).

But these numbers will demonstrate whether or not your sales are truly making the profit they should be. 

The last ratio is not related to finance, but more in terms of operation. How high is your turnover ratio? Ideally, it needs to be higher because it illustrates that you are able to get inventory out the door and demand is stable. Similarly, a higher asset turnover could signify that you are managing assets effectively.

2) Clients

Are your clients coming back? Are they satisfied with the service or products you are offering? If you have lots of one-time customers, but no repeats - it is time to take a look at why that might be the case. Best case scenario, your client base should be a mix of new and old - the key is to keep the existing clients loyal.

If that is not occurring, is it because your business needs improvement in key areas? If not, is it a shift in industry and demand? Ensure that you have a system in place for client feedback, and be able to demonstrate when you improve the business based on recommendations.

3) Talent

At the end of the day, your business is reliant on great talent. Are the right employees being retained, and is their performance up to par? Invest in the right talent, and that will do wonders for improving your business. 

If you are unable to retain talent, and if there are high turnover rates, that is another sign of an unhealthy business. During the exit process, establish key protocols such as exit interviews where employees can be candid so you can learn more about why they are choosing to leave. And work with your employees to provide incentives that work for them, and will convince them to stay - especially if they are rewarded for their loyalty.

To learn more about financial health for small businesses, and how we can assist in ensuring your business remains viable and stable, please contact us.

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