How is the Financial Health of your Business?
Asking, “How is the financial health of your business?” is a loaded question. I meet a lot of small business owners and I am surprised by how many are unsure about how their business is doing. Many small business owners measure their success solely on the available balance in their checking account. Is your checking account balance a true barometer for the health of your business? I do not believe that it is.
When evaluating the financial health of your business, you should be able to answer a few basic questions regarding income, expenses, cash flow, liabilities, and profitability.
Income
Do you know what is your income year-to-date? Do you have a procedure for billing clients? Too often I hear stories of business owners who do not bill their clients in a timely manner because they are too busy, or they do not have a system in place and forget. Say what?!? If you are a business owner that has run into this problem of billing clients, it is time to take a pause and figure out your billing procedures right now! Do not let this important task fall through the cracks, there are ways to automate the process.
If you are billing, consistently or not, do you know exactly who owes your business money and how much? Are any of the outstanding invoices overdue? If there are overdue invoices what is your procedure for about collecting them? These are questions that you should be able to answer immediately if you know the financial health of your business.
Expenses
How are you tracking your business expenses? Are you are spending money on your business then tossing the receipts in a shoebox, if so, you do not have a true picture of your business expenses. Do you use your personal funds to pay for business purchases and not being reimbursed by the business, you do not have a true picture of your business expenses. Have you been charging things to a credit card (personal or business) and are not recording them, you do not have a true picture of your business expenses. Every business expense needs to be recorded in a timely manner to maintain the financial health of your business.
Cash Flow
Do you know what cash flow is and why it is important? Simply defined, cash flow is the amount of money moving in and out of a business. Why is cash flow important? We all have heard the term “Cash is King”, need I say more? Now that we know what cash flow is, do you manage your cash flow? Managing your cash flow means knowing how much money you expect in and out for a specific time period.
Example:
Your bank balance is $0 at the beginning of the month and you will have $1000 in sales. Assume that you only expect to collect $500 of those sales this month. Your ending bank balance will be $500. If you know that you have $700 in cash going out this month, how will you cover the shortfall? What will you do if those expenses are due before you collect the $500, what will you do then? This is cash flow management at the simplest level.
Liabilities
Knowing your business liabilities is just as important. Do you know exactly how much do you owe to your vendors, credit card companies, and lenders? Have you factored in the payments to cover your debts into your cash flow equation?
Profitability
The main reason that people go into business is to make money, correct? Can you tell me if your business is profitable so far this year? Profit = Revenues – Expenses, do you have that information readily available? If the answer is yes, that is great news! If the answer is no, why not? What are you going to change so that you have your profitability information readily available?
Recordkeeping for the Financial Health of your Business
Consistent recordkeeping, as you have guessed by now, is the only way to be able to answer the questions to will let you know the financial health of your business. I specifically used the word recordkeeping instead of bookkeeping to make a point. Bookkeeping sucks, however, having up-to-date and accurate books is vital to the long-term success of your business.
As a business owner, it is your responsibility to have the financial information that you need readily available, but you do not have to do it alone. Are you the DIY business owner who never asks for help? There are a wealth of resources and information available to help you to develop a strategy that works for your business. Schedule a free call with us and let’s talk about how we can get your business on the road to health!