Key metrics to note.
Financial health is crucial to every organisation. Most businesses go through periods of change during which financial health can be shaken and it’s especially important during these times to be able to spot the signs of serious problems. So, what key metrics can you use to measure your business’ financial health?
Budgeting is the basis for sound financial management, whether you’re a tiny business being run from home or just about to receive investment. The balancing of income and outgoings is a crucial part of being able to ensure that a business remains healthy. If your budgets balance every time you do them – your income and outgoings are roughly as expected and your budget is never wildly off course – then this is a sign that your business is doing well and you won’t have to worry about borrowing money.
Accurate financial projections
Profit and loss projections are difficult to get right, especially for early stage businesses where there may only be limited past performance to go on. However, as a business becomes more established, the profit and loss projections should become more accurate and give you a good picture of how the business is performing now – and where it’s likely to be in six to 12 months time.
The size of the debt burden that you carry
Virtually every business uses debt these days. From the smallest enterprise to the largest and most complex organisations, debt has a crucial role to play in enabling growth and giving your business the opportunity to do more and reach further. So, some debt is not a sign of poor financial health – it’s the balance of debt that is important. If debt repayments are crippling because you sought loans for people with bad credit in the early days of your business, for example, then the size of the debt burden has become too large. If there’s simply no hope of clearing the debt in the near future then this could also be a sign that the business is struggling financially. If all your credit balances are constantly maxed out then this is another indicator that the finances side isn’t that positive.
Businesses can survive for years without being profitable so not having vast profits to show for your efforts initially isn’t necessarily a sign of poor financial health. However, at some point a business does need to be profitable to thrive. The best way to measure this is to look at the net margin – the ratio of profits to total revenues, which is measured by net profit / revenue and expressed as a percentage. Anything less than 1% is a sign of a very vulnerable business.
Are your staff happy? There are many ways in which the people who work for you are a good indicator of whether the business is doing well financially. Unhappy staff might have too little to do because sales are low – or be overworked because there isn’t the cash to sufficiently staff your business. If you’re getting lots of complaints or attrition then it could be because payroll is always late or people aren’t being paid the going rate. Alongside the key financial indicators it’s always worth looking at your staff, how they behave and what they feel about where they work, as this is a good barometer of business success.