Should You Assess Your Small Business's Financial Health?
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Are you trying to understand where your small business falls financially? Do you want to expand your small business, but want to make sure your business is financially healthy? Are you looking for tools to determine your small business's financial health?
It is not always clear if a small business is financially healthy, but it can be a smooth process. Keeping a pulse on your small business's financial health is extremely important and can help you determine the path your business is on.
Your Business's Expenses are Consistent
If your business expenses show little to no fluctuation, unless you have an increase in expenses that align with a spurt in sales during certain periods, your small business is most likely financially healthy.
Keep this rule of thumb in mind, if your revenue increases by 7% over a year, your expenses should increase the same percentage (7%/). Keeping a one-to-one mindset with your business's financial planning can help your business stay healthy over-time.
Your Business's Revenue is Growing
If you see a steady increase in your revenue month after month, year over year when looking at your profit-and-loss statement, then your business is most likely financially healthy. You do not need to see spikes in profitability - a slow incline over time, even just by a few percentage points, shows an upward movement and a strong financial outlook.
Your Assets Show Longevity
Having consistent revenue is extremely important, but it also has to do with what you do with your profits. If you are investing the money back into your business, then you may find yourself cash poor and asset rich.
Keeping a healthy amount of cash in the bank is extremely important. Having a low cash balance shows a lack of sustainability. You also want to have your assets liquid if anything urgent arises, so you're not in a position of having to accumulate debt for an unexpected expense.
Your Business has a Healthy Profitability Ratio
Profitability ratios measure your business's return on your sales and investments. Check your profit margin, which takes your annual net profit and divide it by your business's annual sales. To calculate your profit margin ratio:
- Profit Margin Ratio = Net Income / Net Sales
For example, if your business's net income is $100,000, and your net sales are $1,000,000, then your profit margin ratio is:
$100,000 / $1,000, 000 = 10%
Your profit margin is considered healthy when it's on the high side. So, you may be making sales, but your profit margin could still below based on your pricing structure, startup costs, operating costs, and other factors.
Your Business's Solvency Ratio is Low
Try to pay attention to the following solvency ratios, to determine if your small business is financially healthy:
- Debt-to-Asset Ratio = Total Debt / Total Assets
This value measures the number of total assets that are financed by creditors instead of investors.
For example, if your business's total debt is $50,000 and your total assets are $100,000, your debt-to-asset ratio is:
$50,000 / $100,000 = 50%
- Debt-to-Equity Ratio = Total Debt / Total Equity
This value shows the percentage of your business's financing that comes from creditors and investors. The higher the ratio, the healthier your business.
For example, if your business's total loan debt is $500,000 and your bank line of credit is $100,000 and your total equity comes in at $1,200,000, your business's debt-to-equity ratio is:
($100,000 + $500,000/) / $1,200,000 = 50%
Your Business's Activity Ratios Align
Activity ratios measure how you manage your business's assets. Consider reviewing:
- Operating Expense Ratio (OER/) = Operating Expenses / Revenues
Divide your operating costs by your business's total revenue. The lower the ratio, the more efficient you are at spending money to generate revenue.
For example, if your business's operating expenses in 2019 were $4,000,000 and your revenue was $20,000,000, your business's operating expense ratio is:
$4,000,000 / $20,000,000 = 20%
- Asset Turnover Ratio = Total Sales / Average Total Assets
Divide your sales by your assets. The higher the score, the better you are at managing your assets. Remember, when calculating your average total assets, your beginning assets are the assets you had at the beginning of the year. The same goes for ending assets; they're the assets you have at the end of the year.
For example, if your business's total sales for the year are $25,000, your assets at the beginning of the year were $50,000, and your year-end assets are $100,000, your business's Asset Turnover Ratio is:
$25,000 / ( ($50,000 + $100,000/) / 2/) /) = $0.33 for every $1.00 spent in assets
- Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Divide the cost of your goods sold (COGS/) by your average inventory. The higher the score, the better you are at managing your business's inventory.
For example, if your business has an average of $1,000 in inventory and sales of $10,000, your Inventory Turnover Ratio is:
$10,000 / $,1000 = 10 Times
Your Business Has a Consistent Customer Base
If your business has a steady stream of repeat customers and new clientele, your business has the opportunity to generate revenue through multiple means. The cost to acquire new customers can be higher than the cost to work with a repeat client. If you have access to new customers, you can help pad your business if circumstances change. Your customer base heavily influences your small business's financial health.
Need Financing for Your Small Business?
If you find yourself needing to find funding for your small business, First Union Lending is here to help.
We have nine different business loan types to choose from. This means that we're uniquely qualified to help you find the perfect loan to open your small business.
Applying for a business loan doesn't affect your credit. Better yet, your business loan may be approved as soon as the same day.
To discuss our business loans with one of our lending experts, click here or call 863-825-5626. We'll talk about our various business loans and help you find the right one.
Get started with the process now by learning more about our business loan types.