As a business owner, you have certainly experienced several situations where you have wondered if your company is headed on the right track. In this article, let’s review seven signs that your company is in good financial health.
1. Your Revenue Is Growing
Your revenue should be increasing fairly steadily month over month and year over year when you look at your profit and loss statement. Profitability doesn’t have to improve dramatically; even a modest rise of a few percent signals progress and a promising future.
2. Your Expenses Are Staying Flat
You want your expenses to remain constant while your revenue increases. Your expenses may increase if your company suffers a large growth spurt, but generally speaking, this increase should be in line with your revenue growth. In other words, if your revenue is growing by 3% annually, you want your spending to grow by no more than 3% at the same rate.
3. Your Cash Balance Demonstrates Positive Long-Term Growth
Even if your sales may be rising, if all you do with the extra cash is put it back into the company, you may find yourself with more assets than cash.
Your firm is not viable if your cash balance is low or remains unchanged. Maintaining a good quantity of cash in the bank will prevent you from having to take on further debt to cover unforeseen expenses if anything urgent arises.
4. Your Debt Ratios Should Be Low
The debt-to-asset ratio and the debt-to-equity ratio of a company are two debt ratios that should be closely scrutinized. These calculations, also known as solvency ratios, specifically assess how much your company owes concerning how much it is worth. For debt-to-asset ratios, keeping a 2:1 ratio or lower is optimal. Like with most ratios, a lower value is ideal.
5. Your Profitability Ratio Is on the Healthy Side
The return on your sales and investments can be calculated using a few different profitability ratios. Your profit margin is one of the most useful statistics to assess. To do this, multiply your annual sales by your net earnings. The price structure, initial costs, and other reasons may cause your profit margin to be low even though you may be making sales. When it is high, your profitability ratio is seen as healthy.
6. Your Activity Ratios Are In-Line
There are a few different activity ratios that measure how your business manages its assets. Three of the most common are:
Asset Turnover: In this calculation, sales are divided by assets. Asset management is more effective when there is a high turnover ratio.
Inventory Turnover: Your cost of sales divided by your average inventory. If your inventory turnover ratio is high, your inventory is being managed effectively.
Operating Expense Ratio: Take your running costs and divide them by your overall revenue. This measures the amount you shell out to make money. A lower ratio in this case indicates effectiveness.
7. You’re Working With New Clients and Repeat Customers
In comparison to working with the same clients repeatedly, acquiring new clients is more expensive. A continual inflow of new consumers and loyal patrons shows that your company has several ways to make money. Having access to new clients helps protect your company from shifting consumer attitudes and purchasing habits.
In summary:
It’s crucial to consider each of these signs when assessing the financial health of a company. It does not always follow that a firm is doomed or a bad investment if one of these indications is flashing red, but it should make you want to look into it a little more. A corporation with good financial standing has a higher chance of making a wise investment than one with high debt or low equity.
