Financial Matters - Adam Lean
|Adam Lean has served as an accountant, small business owner, writer and consultant. Adam enjoys interacting with entrepreneurs and helping them grow their businesses. He writes on topics of interest to small business owners including business finances, technology in business, and digital marketing.|
Five Ways to Improve the Financial Health of Your Business in 2016
Keeping up with the financial health of your company is as vital for your business as keeping up with your personal health. In this article we will look at five ways you can improve the financial health of your business this year.
Many of these five ways will help support the other five ways. It is best to pick one at a time and work at improving that one and then move onto the next instead of trying to tackle all five ways at once.
#1 - Improve your working capital
Working capital is your current assets less your current liabilities.
If you ended last year with $500,000 in assets and $300,000 in liabilities, for example, then you have working capital of $200,000. The goal is to improve that number this year. Essentially, you just need to improve your assets (cash, inventory, etc.) and decrease your liabilities (debt, accounts payable).
Increasing your working capital ensures that your business is healthy enough to weather a downturn in the industry, a slow season, or any other problem that could arise during the year. It is better to have more margin between your business and financial trouble.
#2 - Develop and stick to a budget
This involves two distinct parts. If your business is not in the habit of doing this, the very first part is to develop a realistic budget. Once you have developed the budget, the second part is to stick to the budget as much as possible.
It is normal for a business to not meet all of its budget goals for income and expenses, however, your budget acts as a guiding light, showing you the direction that your business should be heading. Your business may go off course a little one month but by sticking to your budget it will show you the way to get back on course.
#3 - Study your financial statements
A company’s financial statements are the playbook for your business. You should be basing many, if not most, of your decisions on how they impact your financial statements. The top three financial statements to look at, on a monthly basis, are the Income Statement (also known as Profit and Loss), Balance Sheet (this tracks your assets & liabilities), and Cash Flow Statement (this keeps track of your cash position).
#4 - Track and improve your cash flow
Cash is the lifeblood of your business. It is vitally important to keep track of and improve your cash flow. Some helpful tips:
#5 - Track and Improve Your Key Financial Metrics
Use these metrics to evaluate how well your company is doing. These are gauges just like the speedometer in your car that tells you how fast you are going. The goal is to pick a few Key Financial Metrics to track and then try to improve them over time. There are many helpful ones; here is just one.
Current Ratio - This measures your ability to meet short term obligations (e.g. payroll, accounts payable) with your current assets. The goal is to aim for 2 or higher.
Formula: Current Assets / Current Liabilities = Current Ratio
Current Assets = $100,000
Current Liabilities = $50,000
$100,000 / $50,000 = 2
The goal is to continually track and improve this metric over a long period of time. If you had a Current Ratio of 2 last year, for example, you may set a goal to get it to 2.5 this year.
In conclusion, improving your business’s financial health takes time. It also takes a commitment to improve just a little each day. Just take small steps to improve each day and over the year they will add up to be big improvements to the financial health of your business.
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