Take This Five-Point Financial Checkup for Your Business
Cars get tune-ups. Bodies get physicals. Your business needs an annual checkup as well! Here are five aspects of your business financials to assess, to build sustainable growth.
Evaluate past, present and future financial health
1) Compare financial ratios
Ratios measure financial components of your business to gauge performance. Comparing last year’s ratios to those of prior years is an excellent way to glean financial performance data. Looking at gross margins, expenses as a percentage of sales, aging receivables and accounts payable (among others) gives you a picture of your liquidity, profitability, and operational efficiency. We recommend you look at your business ratios more than once a year; a quarterly or monthly review will help you see opportunities for sales, operational, and financial improvements with greater agility.
2) Budgeting and forecasting
Use budgeting and forecasting to set estimated amounts of capital your business will need for future periods; then compare those figures against actual financial performance to see what you have accomplished (such as reducing spending, lowering debt, or increasing sales) and where to adjust to meet your targets. There may be market conditions that were not forecast when you created the budget, that now inform some course corrections. Or perhaps there is an activity you are outsourcing that you can bring in-house to save money.
Depending on your business, you may develop your own key performance indicators (your success targets). For example, a restaurant may plan for a certain food cost and labor cost percentage of sales; a medical practice might target X dollars in insurance reimbursements based on Y number of patients. Put those into your annual budget, and compare budgets and financial forecasts year over year to build a path to profitability.
3) How are you using debt?
Business growing pains and cash flow crunches are common, and it’s tempting to tap into credit lines or get a loan to ease the pain. But is that borrowed money contributing to future financial health and sustainability? Assess your cash flow needs (in advance when possible) and use the right kind of debt to fill the gap. For example, you should not get a long-term loan to cover short-term liquidity needs.
4) Review inventory levels
Strong inventory management is the backbone of any business that needs products to make what they sell—or sells the products they buy at wholesale. Inventory management requires a balancing act between having enough product in stock and making sure you are not tying up too much cash. When evaluating this aspect of your operation, ask yourself:
- Are you buying stock with enough lead time so that you can produce what you sell without delay?
- Are you taking advantage of competitive pricing, and purchasing enough inventory to hedge against big price increases?
- Are you holding onto product that’s tying up your capital? As we noted in a prior post, it’s better to cut your losses and sell off products at a deep discount to make room for inventory you can use and/or sell more quickly at a higher price.
5) Review insurance and benefits
An annual review of your company’s insurance policies (property & casualty, health, worker’s comp, general liability) will drive better cost-efficiency. Ask your insurance representative to do a full policy review (coverages and costs) to see where you can derive more value for the money. Additionally, evaluate your employee benefits (or consider enhancing them); they can be a good investment that attracts a high-quality workforce that will help your business grow. Looking at insurance and benefits through the business financial health lens will also help you make informed decisions about this cost center.
- Ensure your coverage is aligned with your business or process; if something has changed, your policy needs to change as well.
- If you store inventory off-site, is that fully and properly insured?
- Assess your cost per insurance plan or retirement plan participant
- If you don’t yet offer health insurance or a workplace retirement plan, can you afford to do so? Conversely, can you afford not to?
- Consider offering group term life insurance, which is very affordable for employers and is an attractive employee perk.