As a business owner, your company’s financial health is of the utmost importance. There is more to measuring your financial health, however than simply looking at how much money is in the bank. Business accounting services are essential for most businesses to stay on the right track. Let’s take a look at the signs of poor financial health in small businesses.
1. Inability to Pay Your Debts
If your debts are mounting debts and you’re juggling your cash – it’s time to look at ways to improve your cash flow and get back on track.
Think about ways you could increase cash flow, such as:
- preparing weekly cash flow forecasts to understand what has to be paid – and when it’s due to be paid
- selling old or excess stock
- having solid procedures in place for collecting outstanding debts from customers – and stick to them
- talking to your bank about putting a temporary loan in place – such as an overdraft.
2. Dwindling Cash or Losses
Companies that lose money quarter after quarter burn through their cash fast. Be sure to review the company’s balance sheet and its cash flow statement to determine how the cash is being spent. Also, compare the current cash flows and cash holdings with the same period in the prior year to determine if there’s a trend.
If the company is burning through cash because of increases in investing activities, it might mean the company is investing in its future. However, if on the cash flow statement, the company is putting its cash to operating activities and still not earning a profit, it might be a concern. Also, watch for large increases in cash because the company might have sold an asset, thus inflating their cash position to cover losses.
3. Low Current Ratio
Similar to checking your company’s financial solvency, you’ll also want to do an assessment of your current ratio. This involves taking the total number of assets you have (whether liquid, cash or otherwise) and dividing it by your total number of liabilities. The goal is to have a current ratio that falls between 1.5 and 3.
4. Continually Replacing Staff
If you have a high staff turnover – you could be wasting valuable resources having to spend time and money on training new staff.
Think about ways to reduce staff turnover, such as:
- having a recruitment plan in place that outlines the attributes your staff need to meet, such as any qualifications, flexible to working hours, being a team player – invest some of your extra time at this point to ensure you employ the right staff for your business
- being an employer of choice – provide great support and training to your staff and the word will get around
- involving staff in managing the business – you’ll get more commitment when your staff have a say
- making sure the culture within your business provides the types of rewards your staff is looking for.
5. Inadequate Financial Records
Financial records are the backbone of your business. It’s critical to keep your records up-to-date and monitor them regularly – make sure all your invoices and payments are entered weekly into your financial system. It is essential to review your profit and loss statement monthly.
A cash flow forecast monitors the cash position of your business, and this should be prepared at least monthly – doing weekly forecasts will show you what payments need to be made, and where the money is coming from.
6. Your Not Taking A Salary
If you’re struggling to pay your employees and you have not taken a salary from the business for a few months, then that could be a sign the business is failing. Even if you’re waiting for a big payment to come in, it may not be enough to correct the situation over the long-term.
7. High Levels of Debt
As with your personal finances, there is a tipping point for your business between acceptable and unacceptable debt. There are two specific ratios to measure: the debt-to-equity ratio and the debt-to-assets ratio.
Debt-to-Equity Ratio: You’ll need to know how much debt your company owes and how much equity you have; divide your debt by your equity, and you have your debt-to-equity ratio. For example, if you owe $100,000 in debt and have $25,000 in equity, your ratio is 4:1.
Debt-to-Assets Ratio: Similar to the previous ratio, you’ll need to know how much debt you owe and how much you own in assets. You would again divide your total debt by your total asset amount. For example, if you owe $100,000 in debt and have $50,000 in assets, your ratio is 2:1.
It’s hard to say what acceptable ratios are; as with most ratios, the lower the better. The quickest way to increase your ratio is to pay down your debt and avoid incurring any more.
It’s Time To Get Your Business On The Right Track
Follow these suggestions to help make running the financial side of your business easier, and get your business back on track:
- Make sure you have a good filing system in place that makes it easy to find invoices, bank statements and all the information you need to keep your financial records up-to-date.
- Set aside time each week to update the financial records and review them – perhaps on the quiet trading day so you won’t become distracted.
- If you haven’t already, find a good outsourced accounting services or small business bookkeeping services., and ask them what key financial areas should be reviewed regularly.
- Update your financial management training – there are a number of seminars and workshops you can attend to help you better understand your figures.
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