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How to Review the Financial Health of Your Business

Are you a business owner and looking to review the financial health of your business in Australia?

If so, there is a good chance that there are various financial elements of your business that you are tasked with reviewing, or at least overlooking.

This can be a bothersome and sometimes difficult task to both undertake and manage alongside the other parts of the business that you must supervise.

It might assist you to know how to conduct a concise and clear financial health review.

In this article our credit collection agents will list some of the steps necessary to undergo a financial health check of your business and how these steps are taken.

Financial Health of your Business - Financial Ratios

The best first step to take in reviewing the financial health of your business is the work out the ratios of your finances.

This can function as a point of comparison between your business and how healthy it is, as poor ratios represent poor health.

There are various types of ratios that you may apply to your finances, some more important than others depending, of course, on the specific details of your business.

Some of the more important ratios you may want to test include:

  • Liquidity: You can work this one out by dividing your current assets by your current liabilities.
  • Profitability: You can work your profitability by dividing your gross profit by total sales.
  • Solvency: Your solvency is all of your current liabilities.                  
  • Return on Investment: You can work this out by multiplying your tax by 100 and then dividing this number by the business’s equity.

The data required to solve these equations should be located within your business’s financial records.

A financially healthy business will generally have an organised system of records, so if you cannot locate this data this may be a red flag of poor financial health.

Financial Health of your Business Strategically

Now that you have your basic structure for your review of financial health, it’s time to try some strategic thinking and planning.

You should realistically be updating your business financial plan every month or so to keep your systems modern and functioning to the best of their abilities.

Each month you will likely learn at least one new thing about business and how to properly manage one’s finances.

You should be applying that knowledge to your business while it is still fresh in your mind, not a year when you’ve already forgotten most of it!

Even if you don’t learn something, just having each month’s fresh eyes on your business and financial plan can be truly beneficial.

This may not fit into your busy schedule, however, so an annual review with plenty of notes in between will suffice if necessary.

Review Your Sales Pipeline of your Business

A look into your business’s sales pipeline will likely tell you more about your financial health than you may think.

Your business's sales pipeline can give you a comprehensive understanding of your current sales and progress of said sales and how they are likely to change and develop in the future.

You can then use your understanding of sales to make informed changes to your business and sales plans to reach goals or just overall grow as a company.

It also assists in recognised clients that keep coming back to your business, occasional clients, and new clients so you can identify where the majority of your efforts should lie (depends on your business strategy but the focus will generally be on regulars/repeat customers).

Different customers require different treatment and assistance, so this can really help you to know how to treat different people.

Financial Health of your Business - Review Your Cashflow

Cash flow is an integral part of business, and a simple look into it can tell you a lot about your company.

The cash flow of a business is the amount of money entering a company, as well as the amount of money, said company is spending.

A good cash flow is one of the most significant parts of maintaining the financial side of a business and if the cash flow becomes negative you may be forced to either liquidate or declare bankruptcy.

Financial Health of your Business - Check Your Debts

Debts and debt collection can be difficult to maintain, even just in your personal life.

This struggle becomes so much more difficult when you have several other aspects of the business to manage.

Between employees, your product or service, and the other financial matters within a business, there may not be much time to allocate to debt analysis.

Unfortunately, it is necessary to find the time. Checking your debts is so important to keeping your company on the right track financially speaking and ensuring that interest fees and missed payments don’t send you bankrupt!

Remember, debts and demand letters will not simply disappear because you ignore them!

Stop putting off checking and, more importantly, paying your debts; you may live to regret it.

Financial Health of your Business - Create a Plan

A financial plan is a great way to progress with your business's cash flow and is overall essential to the development of your company.

So, why is a plan so important you may ask?

Well, a plan allows a clear idea of what you wish the future to bring your business and what action you should take to make this happen.

A financial plan should be well researched and informed, as there are many details and variables out there that may influence the effectiveness of each plan.

In other words, one plan will not suit all, so it is important you research so you can apply strategies to your individual business model.

To create a financial plan, you should be considering all aspects of finance related to business such as profit, business expenses, employee wages, and more!

Invest in Your Businesses Future

This one may be a little broader, but it is important that you invest in the financial future of your business.

There are various aspects you should invest in to create the best possible future for your business.

The main one is to invest your time into a careful and precise overlook of your business and the financial aspects of the past to ensure you avoid past mistakes and learn from them in the future.

You may even want to invest in some tools to assist your review.

Do you have unpaid business invoices or business debts?

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