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How to Conduct a Financial Health Check for Your Business This 2024

analysing business financial report

If you’re a new business owner, one of the hardest lessons you may be learning right now is just how difficult it can be to determine the financial health of your business. All the more if you don’t have bookkeeping skills or a general finance background; you may not even understand what all those figures you’re recording (or should be recording) actually mean.

Now’s the time to brush up on your financial housekeeping and learn how to do a serious financial health check. Doing so will increase the chances of your business succeeding in 2024 and beyond. To that end, here are the basic steps for conducting a wellness check on your budding business endeavour and building a more solid foundation for your financial decision-making:

1. Gather Your Financial Statements

The first step is to collect all your business’s most recent financial documents, particularly its balance sheets, income statements, and cash flow statements. While many other documents could be used to supplement these, these key statements are usually enough to provide a fair idea of the business's financial status.

Of course, for this step to happen, you will need to have been documenting your business’s transactions accurately. Whether you’re having problems keeping up with your books or simply want to have a good head start when incorporating your business, be sure to get in touch with accountants Dunedin entrepreneurs depend on.

2. Analyse Your Profitability

The most important question you’ll need to ask during your financial health check is, of course, whether your business is actually making money. To get an idea of this, you or your finance team must calculate your gross profit margin, net profit margin, and return on investment (ROI). Assuming your books are accurate, these key profitability ratios will indicate how efficiently your business is creating profits from the money that is being spent on it.

3. Assess Your Liquidity

Look at your business’s current ratio (current assets / current liabilities) and quick ratio (current assets - inventory / current liabilities) to evaluate your business’s available cash reserves. This will give you an idea of whether it’s capable of easily paying off short-term obligations or if it might have to renegotiate to get some breathing room.

4. Examine Your Cash Flow

As far as financial performance goes, cash flow is arguably the most important indicator of a business’s viability. A lot of positive cash flow relative to outflows usually indicates that your organisation is in good shape, especially when coupled with low debt levels.

Using your cash flow statement as a guide, pay attention to operating, investing, and financing activities to see if there are opportunities for cash flow optimisation.

5. Review Your Debt Levels

Your business's debt-to-equity ratio and debt-to-assets ratio directly indicate its leverage and relative financial risks. Generally speaking, high levels of debt relative to equity or assets are not ideal. However, these figures should be contextualised with other metrics like cash flow and liquidity to provide you with a more complete idea of your business’s health.

6. Evaluate Your Inventory Turnover

The inventory turnover ratio indicates how quickly inventory is sold and replaced, showing potential waste or slow sales that tie up cash and impact profits. In retail, the idea that “inventory is money” is usually taken as truth. However, the same general principle applies regardless of your business type, as inventory not only costs money to acquire but also to maintain.

7. Check Your Accounts Receivable

While receivables are assets, they do very little for you unless you’re able to collect them. Your accounts receivable turnover ratio and average collection period can give you insights into the efficiency of your collection efforts, perhaps revealing the ideal purchase options you need to offer your customers.

8. Make Apples-to-Apples Comparisons

Your business’s performance must be placed within the wider contexts of its industry. For instance, you can hardly make a fair comparison between the financial performance of a food kiosk and that of a residential real estate broker.

Fortunately, financial ratios of businesses similar to yours are usually available for review, giving you an idea of how your operations compare. You can use them as a basis for performance metrics to aim for and to glean insight about potential improvements you can implement in your organisation.

9. Identify Areas for Improvement

Based on your analysis of all the previously mentioned considerations, look for operational areas where you can reduce overheads. This can involve anything from developing new offers that boost sales figures to improving your marketing campaigns to reduce the cost per sale. Regardless, these improvements should be implemented without seriously compromising on quality or your business's overall vision.

10. Create an Action Plan

Once you know what your main challenges will be, it’s now up to you to develop plans to address them. Make sure that the plans are not merely hypothetical, with specific goals and strategies to mitigate or maximise different challenges and opportunities.

11. Monitor and Adjust Your Financial Approaches

Having a set action plan is great since it allows you to avoid distractions and just focus on one long-term goal. However, you must also be flexible enough to readjust your course according to whatever may be happening in your market. To stay on track and avoid serious risks, take some time each month to look at financial performance and adjust your strategies as needed.

The frequency of your financial wellness checks should be around every quarter and probably not more frequently than that. This should give you enough headspace to perform everyday tasks and still be frequent enough to give you a heads-up on any looming challenges.

working on business reports

Contact Target Accounting to Help You with Your Business’s Financial Health Checks

Now that you know what you need to do, you’ll have a more realistic picture of your business’s financial health, making it simpler to position it for a repeatable pattern of growth and success.

If you’re having difficulty conducting any of these steps, be sure to contact Target Accounting, a company with a proven track record for helping Dunedin businesses with their financial performance. On top of our accounting services, consider exploring our business advisory services, HR services, accounting software integration services, and international client services wherever they apply. Let us help you stay on the mark with your business’s financial objectives!


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