Monitoring your business health is vital for various reasons. Investors, lenders, and potential buyers will all be interested in understanding your business’s financial situation and long-term viability. While no figure comprehensively describes the state of your business health, there are several reasonably simple metrics that every business owner should monitor for a good overview, some of which are liquidity, solvency, profitability, and operating efficiency.
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- No single metric paints a complete picture of your business’s financial health. Luckily, simple factors, figures and ratios can give you a good idea of how well it’s going in the present and what you can expect in the long term.
- Many businesses don’t become profitable right away; that’s perfectly normal. But if your company hopes to be sustainable, this should be one of your immediate goals. How do you best manage your cash flow to maximize profits?
- A business credit score is a surprisingly insightful measure of a business’s financial health and is one of the top considerations for lenders.
- What are some easy measures of your business’s financial health? It is no simple feat to monitor and analyze all your business metrics. Fortunately, digital tools like those offered by CreditPush can help you stay on top of the numbers.
How to Know if Your Business is Financially Healthy – Simple Measures
No single number tells the whole story of a business’s financial health. Luckily, several metrics can help to paint a complete picture of a business’s viability in the present and long term. These metrics can be derived from your balance sheet, cash flow statement, income statement, and business credit report
Check your Business Credit Score
A Business Credit Score measures a company’s track record of paying back debt. While this isn’t a business valuation tool, it is generally an excellent measure of a company’s financial stability, trustworthiness, and ability to access essential financing. Your credit score will come from a credit bureau in something called a business credit report. A healthy company will often have a higher credit score. This means that in the past, their loan payments have been made on time, and lenders are comfortable giving them money in the future.
How can you check your business credit score? You can check your business credit score for free with CreditPush. If you have a bad credit score, we can help you improve it, and if you have a good score, we can help you leverage it for increased financial success.
Assess how much debt you have.
Your debt to total assets ratio tells you how much of your company belongs to lenders and how much of it actually belongs to the shareholders. It is measured by dividing the total value of debts by the total value of assets. A lower number is better than a higher one.
Is your business profitable?
The purpose of any business venture is to make a profit. Hence profitability is one of the most important factors in determining if a business is healthy. Most companies are not immediately profitable, and that’s okay. When your revenue exceeds your expenses, you are said to have made a profit.
It is good to note that profit is a tricky thing to maintain. Keeping your running costs low and predictable will go a long way in helping you keep your profits, and by actively increasing sales volume or revenue, you stand to scale your gains significantly.
How liquid is your business?
Liquidity measures the amount of cash a business has access to, and how easily it can raise cash to meet short-term obligations. We can measure this as a liquidity ratio. A liquidity ratio of 1:1 means that your business has just enough money to cover its current debts. 1:2 or 0.5 means the business’s cash can only cover half of its current debt. A high liquidity ratio, like 2:1 is usually a good sign. This means that liquid assets will more than cover current liabilities.
Solvency is very similar to liquidity; it measures a company’s assets against its liabilities. This time, however, it refers specifically to long-term debt and fixed expenses such as leases, loans, taxes, or any other debt the business has. A higher solvency ratio shows that a company is well-equipped to handle debt further down the line.
In conclusion
It is no simple feat to monitor all your business metrics, analyze them, and keep them all under control while continuing to create and sell your products or services. Fortunately, digital tools like those offered by CreditPush can help you stay on top of the numbers. By connecting your business apps, you allow them to analyze your income, expenses, assets and debt, giving you a 360-degree view of the state of your business, including personalized recommendations to improve your business credit score, financial practices, and ultimately, your business’s overall financial health.
