How to take care of yours Business financial health
Many indicators need to be part of an organization’s assessment process. In this sense, one of the most important is the one that indicates the current stage of corporate financial health. Without it, it is difficult to say whether an operation is profitable or not. Even with high revenues, it is possible that the return is negative and this can be indicated by this variable.
In this article, you’ll see exactly why this analysis is so important. As you read the text, you will understand the concept more deeply. You will know what are the existing ways of measuring the financial performance of a company. Additionally, you will learn about three ways to obtain the current result achieved by the company in question. Good reading.
What is the importance of business financial management?
In the mission of running a business, monitoring financial health is an essential activity. Interestingly, this task is usually dismissed from the day to day of many entrepreneurs, unfortunately. Perhaps for this reason, most enterprises end up closing their doors in a short period of time from their foundation.
This information alone should be enough to justify the importance of financial management , but the arguments go further. In times of crisis (yes, they always come) the companies that usually survive are precisely those that are financially organized. Part of this organization means having cash on hand and, without planning, it is difficult to achieve this.
Hence the relevance of financial control: keeping the company strong enough to withstand moments of economic weakness in the market, through plans and good management. Without this, it is difficult to envisage a prosperous future, the goal of every company that presents balance in its accounts and financial statements.
How is it possible to measure the financial health of a business?
There are some variables that can give a good guide regarding the financial conditions of the business. Below are three of them that are particularly relevant.
Cash flow is perhaps one of the most important indicators for the financial management of a business. It shows the result of inflows and outflows of resources in the company, considering future flows. In this way, it is possible to carry out a very important stage of management: projections.
They are the ones that make it possible to assess the productive capacity of an enterprise. With this information in hand, the planning of a company’s course can be done in a much more precise way. It is also possible to see more clearly whether the ability to pay in the future is compromised or not and to take actions to correct any problems.
On its own, we can say that this indicator is the most representative of corporate financial health. The reasoning is simple: if the organization is able to generate profit in order to preserve its own investment capacity and remunerate its partners or shareholders, then it is quite healthy.
Additionally, an important factor needs to be considered, since it is not directly measurable through numbers. It is necessary to account for the hours of work invested in the business by its owners and identify whether the expected return is being achieved. Variables such as quality of life also need to be taken into account, as it is pointless to conquer the world and lose one’s soul.
This indicator is achieved in a simple way and helps to have a good clarity about the financial health of the business. To arrive at its value, simply subtract all operating expenses from gross profit. Therefore, we have the value of the operating income and we can estimate the efficiency of the company in that period. All of this can be translated into the organization’s ability to generate value for its customers.
How to assess the current financial health of the company?
In order to be able to effectively measure the current moment of a company in relation to its finances, the topics explained below can be used.
Volume of business
Monitoring the revenue generation of a business provides important data regarding the development of the enterprise. Knowing whether sales targets were achieved or whether new consumer markets were successfully explored are examples of information that business volume growth can indicate.
However, close attention is required when considering the evolution of earned income. The reason for this is that, even if more deals have been signed and revenue has increased, the company may show a loss. This may sound crazy, but it’s true. Spending also needs to be monitored very closely, which is why the next topic has to go along with assessing turnover.
Assessing the result obtained is the right way to complement an analysis of the revenue generated by the company. This means a much more refined analysis process. It reveals what percentage of the money coming into the company represents profit. What’s more, it can also show the result of the company’s efforts to reduce expenses.
This metric alone can say a lot about a venture, after all, a profitable company shows strong indications that it is financially healthy in days. Even if this is the case, it is possible to improve your performance by seeking to increase profitability. It indicates how sales are being sufficient or not, and allows listing actions in this regard.
Finally, the level of debt needs (I repeat, needs) to be monitored very closely, with as much attention as possible. In this regard, it is also necessary to understand that having debts is not an indication of financial problems, but having them and not knowing their impact on the company’s cash flow.
Thus, the amount payable known as a liability must always be known. It comprises, among other variables, financed debt, salaries payable , commitments to suppliers and bank debts, among others. The relationship becomes clear when making this calculation in relation to the company’s total equity and revenue. The lower the debt ratio, the better it will be for the organization.
Maintaining the financial health of the company within days is part of the tasks of a business manager. Without this, it is difficult for an enterprise to find a prosperous path to follow. The investment capacity in the company itself must be preserved and to reach this level it is necessary to have a good prior planning. Several indicators need to be included in this plan, as they are able to indicate whether there is a problem and its origins.