How do you know if your business has taken off successfully and is in good financial health? As an entrepreneur or business owner, it’s important that you know how to determine if your company is reaching its objectives and delivering (or exceeding) the results you expect, just as how you can tell if it’s taking a loss.
Running a business will get you caught up with the day-to-day operations and duties. However, it’s vital that you take a peek at where you stand to see if you’re hitting your goals. There are different ways you can tell that your business is doing better than usual. Take a look at the signs that implies your company is in good financial shape. Let’s dive into it!
- Your revenue is increasing
Revenue is the total amount of income your business makes for selling goods and services. Have a look at your profit-and-loss statement. If you see some growth in revenue month after month and year after year, you’re on the right track.
Don’t be disappointed if you see steady growth and not significant growth. Continued growth over time shows that your business has a healthy future ahead. A couple of percent upward movement is a lot better compared to rapid business growth, as the latter can put too much pressure on you to redesign your workflow that you end up making poor business decisions.
- Your expenses stay flat
As a business owner, you know that it takes money to make money. Often, expenses grow as your business grows. But generally, you’d want your costs to stay in-line and not go beyond your increased revenue percentage.
If you see that your expenses stay the same or aren’t growing faster than your revenue, take it as a good sign that you’re doing something right since you’re making more than you’re spending for your business, and it doesn’t expand more than your revenue.
- Your cash balance is steady
If you manage to allot a good portion of cash in the bank as your revenue sees a stable increase, then you’re managing your business finances a lot better than others. Investing the earnings back into the business can definitely boost assets, but if it means being low on cash, it can make business unsustainable.
Keeping a healthy cash balance means you’re ready in case anything unexpected or urgent expense occurs. This financial preparedness means you don’t have to incur more debt than you can manage instead of putting your earnings back into the business.
- Your debt ratio is low
What are the debt ratios you should specifically keep an eye on? That would be your business’ debt-to-asset and debt-to-equity ratios. These numbers show how much your business owes and how much it is worth identified in percentage or decimal value.
Since it’s debt that we’re talking about, you’d want to keep these figures low. You don’t want to see high percentages for your debt ratios since it means that your business may be put at risk of defaulting on loans and other liabilities.
- You’re working with new and existing customers or clients
One of the easy ways you can tell that your business is successful (and echoing that financially) is when you’re getting more customers—new customers that are showing up, while your repeat customers keep coming back, with some even advocating for your business.
Moreover, the cost of attracting new clients is a lot higher than working with repeat or loyal customers. Regularly acquiring both new and repeat customers indicates that your business provides many options for making revenue.
Metrics to monitor and measure for better business financial health
Key Performance Indicators (KPIs) are structured and measurable values that allow you to see whether your business is profiting, growing, and reaching its goals. It lets you know where you can adjust your strategies for better improvement. These are some of the critical KPIs for your business’ financial health.
Net profit
Net profit = total revenue – expenses
One of the first metrics businesses should look into when evaluating financial health is the net profit. From the get-go, it will show if your business is growing more profitable every year. One thing to note when reviewing this is it’s normal to see the numbers fluctuate. You can see better progress by comparing the same period in the past year.
Net profit margin
Net profit margin = net profit / revenue
Much like net profit, the net profit margin points out how much profit your business makes from its revenue after subtracting your expenses. If you see that you have a high net profit margin, that means you’ve done right at pricing your products. On the other hand, a low net profit margin indicates that your business is at risk, and your profits are highly likely to fall as well.
Free cash flow
Free cash flow = cash from operating activities – capital expenditures
In the business world, cash is king, and it is a reality. You can make a lot of sales on credit, but having cash coming in means your business has money on hand. Positive free cash flow shows that you have more cash coming in at your disposal than going out, allowing you to sustain your regular operations and capital expenses whenever you need.
Summing it up
Taking the time to sit down and look at the big picture by analyzing where your business stands financially is critical for your growth and success. You need to look at your financial statements and learn about your organization’s fiscal health to make wiser decisions, steering your business in the right direction towards higher revenue and profitability.
