How To Check the Financial Health of Your Small Business?

Monday, 27 Dec 2021

Entrepreneurs need to be aware of the financial status of their business at any given point to understand its performance. Without this knowledge, they cannot make informed decisions related to buying equipment, starting a new product line, or entering new markets.

Without the correct information about the funds available with the business, the entrepreneur can make damaging decisions that can lead to losses. Thus, entrepreneurs rely on bookkeepers in Melbourne to take charge of the financial aspect of the business.

The professionals keep them abreast with the current financial status and help them invest wisely without incurring any losses. They play a significant role in the organisation by informing the owner, management, and stakeholders about the real-time financial data. Let us understand how bookkeepers assess the bottom line of their firms to help the entity grow.

1. Financial Ratios Analysis

Financial ratios are calculation methods that bookkeepers use to determine the financial well-being of an organisation. As a business owner in Melbourne, you must know about these ratios to conduct the assessment on your own whenever required.

Bookkeepers often use them to compare the ratios of the past financial years with the current years to analyse the performance of the business. You can look at them when you wish to check the company’s financial status. The commonly used financial ratios are:

  • Liquidity Ratio = Current Assets/Current Liabilities

It calculates the competence of the business to pay its bills on time. It includes quick ratio = current assets – stock at hand/current liabilities.   

  • Solvency Ratio = Total liabilities

It assesses the ability of the business in Melbourne to pay off its debts without touching the cash flow. It includes the leverage ratio = total liabilities/ equity and the debt to assets ratio = total liabilities/total assets.  

  • Profitability Ratio

It compares the net and gross margin ratios to understand the performance of the business in each period. It involves gross margin ratio = gross profit/total sales and net margin ratio = net profit/ total sales.

  • Management Ratio

Bookkeepers analyse the utilisation of the working capital by the business in Melbourne by evaluating stock management, debt management and payment of bills.  

2. Analysing the Balance Sheet

If you do not want to spend too much time looking at different financial ratios and understanding their importance, you can screen the balance sheet. It offers a glimpse into the financial health of the business in Melbourne during a specific timeframe.

You will be able to check your assets, liabilities, and owner’s equity. Thus, you will know how much the business owes to moneylenders, how much liquid assets are in the ownership of the company.

It also gives an insight into the tangible assets, the time taken between invoicing and receiving payments from customers and the time taken to sell the stock on hand. All this information comes in handy in evaluating the viability of the business in Melbourne.      

3. Checking the Cash Flow Statement

The cash flow statement prepared by the bookkeeper informs the business owner in Melbourne about the utilisation of the capital during an accounting period. It describes the sources of the capital that came into the business and on what it was spent, such as advertising, administration, salaries, etc.

While the other two financial reports (balance sheet and income statement) are based on accrual accounting, the cash flow statement provides information about the actual movement of capital.

It eliminates the non-cash transactions and presents an accurate description of the financial health of the business. 

Using the cash flow statement, the bookkeeper can analyse how much money is spent on business operations, the net cash flow, and how much is generated through sales and funding.

The cash flow should always be positive because a negative cash flow indicates that the business incurs losses. Thus, bookkeepers also generate a cash flow forecast to plan for the months ahead.   

4. Assessing the Income Statement

The income statement is one of three significant financial reports that are regularly generated by the bookkeeper. As the name suggests, it informs the entrepreneur about the income and expenditures of the company in each timeframe, such as quarterly or annually.

It helps to determine the cost of goods sold, sales, gains, gross profit, expenses, depreciation, net income, income tax, etc. Bookkeepers use it to identify if the profits can be increased by reducing the expenses and boosting the sales or not.

It also helps in understanding if the project and policies are working in favour of the business or need to be tweaked or eliminated completely to avoid losses. Thus, the business owner in Melbourne can easily determine the efficiency of the operations through this document that lists all the profits and losses.

5. Evaluating the Debts

Debts have a significant impact on the financial health of the business. As a business owner in Melbourne, you need to make sure that you are not taking too many loans that can turn into unbearable liabilities.

You can manage some debts like funding from venture capitalists to expand the business that is repaid by offering shares of the company. However, if you have taken a bank loan to manage your daily operations, paying off the debt can become financially distressing.

You may struggle to make the payments and incur penalties that can lead to bad credit scores and ultimately a huge financial deficit that may be impossible to cover. Thus, bookkeepers keep a close watch on the debts and do not let them go overboard. They also help you find sources that offer low-interest rates and can be paid off quickly.         

Conclusion

Evaluating the financial health of the business is a part of the activities performed by bookkeepers in Melbourne. It helps them keep it performing according to the business goals and moving towards growth and expansion. As a business owner, you can check the financial status of your business using the metrics mentioned above.

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