Small business owners have to learn many skills throughout bringing their idea to life. One part of the process involves assessing the financial health of the business. This is a critical step, as it will tell entrepreneurs how well their business is doing – and what needs to change.
Understanding the financial health of an organization can help business owners and managers better direct the company as a whole. It’s also a good way of checking up on the business as a whole – consider it a yearly health check for the business.
Checking the Balance Sheet
The first step in this process should be checking the business’ balance sheet. A balance sheet is a statement that should showcase the business’ financial situation at any given time. If it isn’t up to date, then this already tells you a lot about the company – and is an urgent sign that more administrative work is needed.
Ideally, a balance sheet should contain information about assets, liabilities (debt), equity, and any other relevant financial information. This can help one calculate how much the business is worth versus how much is owed.
Look at Profits
Next, it is time to look at a company’s profits. This is a fast way to understand how much money a company is bringing in. Don’t forget to subtract the bills from the total revenue, as this will create a better understanding of the overall value.
Evaluate Inventory and Costs
When trying to understand whether a business is financially healthy, it helps to understand the business’s operating costs. This means analyzing the cost of inventory and any additional expenses.
Look at the cost of goods sold (COGS). It is possible to evaluate how much needs to be sold to maintain a healthy balance with these numbers. If the numbers are skewed, it may be time to assess the prices.
Finally, it is essential to look at the financial ratios of a company. Financial ratios cover a variety of health evaluations for a company and can give a broader idea of how the company is doing. These financial ratios include:
- Coverage ratio
- Current ratio
- Debt-to-equity ratio
- Gross profit margin
- Inventory turnover
- Net profit margin
- Quick ratio
- Return on equity (ROE)
- Return on assets (ROA)