People tend to assume everything is ok until it becomes obvious it isn’t. Healthcare professionals will tell you there’s nothing wrong with having regular check-ups even if you feel fine. You never know what might be going on beneath the surface, and it could save you from being seriously ill further down the line.
The same logic applies to businesses. You might think everything is running smoothly, but how do you know? Especially when it comes to finances, warning signs that things are not as they seem are easy to miss, getting buried in layers of operational detail and complexity.
That’s where a financial health check can prove invaluable. And it doesn’t have to be all about revealing deep-seated problems and saving your business from disaster. A financial checkup is just as useful for spotting opportunities for improvement and growth. It’s a great thing to do before preparing business plans, for example.
So what do you need to look at to understand the financial health of your business? Here are five key things every checkup should include.
Cash flow analysis
Cash is the lifeblood of any business. A cash flow statement shows how much cash is coming in and going out. A healthy business should have a positive cash flow, which means more cash is coming in than going out. It’s a key measure of business growth. By contrast, a negative cash flow means you risk not having money available to meet payment obligations, which can lead to insolvency. Even a fairly neutral cash flow is a sign that adjustments should be made, as it would only take a small hiccup for it to become negative.
Debt review
Finance is an important and necessary means of businesses being able to make investments with a view to growth. But debt can become a crippling liability if not managed properly. A financial health check should review the business’s debt levels, interest rates, and repayment terms, and recommend action if there are signs that the debt burden is hampering cash flow and profitability.
Another reason to consider restructuring existing debts or consolidating loans is to take advantage of lower interest rates. A healthy debt-to-equity ratio is important for creditworthiness and investor appeal.
Profit and Loss (P&L) statement evaluation
The P&L statement is a snapshot of the business’s financial performance over a specific period. It shows the business’s revenue, expenses, and net profit or loss. A financial health check should review the P&L statement to identify trends and patterns. For example, is the business’s revenue growing? Are expenses under control? Is the business profitable? These are key questions that go right to the heart of evaluating financial health in the short and long term.
Inventory management
Every business wants to have enough product in stock to meet customer demand. But having high levels of unsold inventory locks up cash and reduces liquidity, which can have serious repercussions for cash flow. A financial health check should review the business’s inventory levels. Excess levels are an indication that procurement and/or pricing strategies need to be looked at. If cash flow is also a problem, finding ways to sell off the stock quickly could be explored.
Tax compliance and planning
Finally, taxes are not only a major expense for any business, but also a significant administrative burden. Reviewing tax liabilities and compliance as part of a financial health check can help businesses keep on the right track, budget for taxes owed, but also potentially highlight opportunities to benefit from relevant deductions and credits.
Speak to an expert
Ready to get a financial health check for your business? Get in touch with the Xeinadin team to book your appointment.