How to Conduct a Business Financial Health Check

When was your last check-up?

And no, we’re not here to talk about when your last doctor’s appointment was!

Regularly reviewing your business’s finances is key to maintaining financial health, but where do you start? What will give you the most accurate picture? 

We’ve put together your financial health audit checklist so you can not only listen to the signals of your business, but also look at the numbers to make clear, data-driven decisions.

Revenue and Profit Margins

First things first, you need to review your revenue and profit margins to understand what your “take-home” is, the amount your business makes before operating costs and expenses, as well as after. For this, you’ll want to examine trends in revenue, gross margin, and net profit over time, and look for stable or improving margins as a sign of good financial health.

Cash Flow Analysis

Healthy cash flow is essential for covering operating costs and funding growth. Conduct a review of cash inflows and outflows to understand your cash flow cycle. Does your inflow exceed your outflow, or vice versa? When you can accurately answer that question, you’ll begin to understand more clearly how it ebbs and flows and how you can anticipate both to your benefit and sense of security.

Debt-to-Equity Ratio

Debt is part of running a business; Whether business loans, lines of credit or credit cards, debt is a part of our daily life, but how is it impacting your business? Having a reasonable amount of debt compared to what a business owns shows that its finances are in good shape. How do you “shape up”? To understand this, you need to calculate and evaluate your company’s debt levels. Having a reasonable amount of debt compared to what a business owns shows that its finances are in good shape.

You can calculate this using this formula:

Total Liabilities (Short-Term Debts + Long-Term Debts + Other Fixed Payments) / Shareholders’ Equity = D/E Ratio

Knowing this number will help you further understand the profitability of your company and how much debt you rely on to finance and fund your business. The higher the ratio, the more debt you have to equity. The lower the ratio, the less debt you have. Some investors may see a high ratio as a risk. 

Expense Review

It’s really easy to let expenses get out of hand in business. Sometimes it’s software, sometimes it’s hardware, or sometimes it’s just all the little things. One of the best ways to review your cash outflow is to look at your expenses, analyzing major expenses and their trends. High or increasing expenses without a corresponding rise in revenue may signal inefficiencies. You want your expenses to make sense for your revenue, so if they’re not proportionate, you need to adjust accordingly. It’s important to note that if you have a team, it’s likely your highest expense line - that doesn’t mean that you necessarily have to make changes, but try to find ways to help ensure it’s driving revenue one way or another. 

Now that you have your checklist for your financial check-up, it’s time to do the work! You should be doing each of these in small ways monthly, but for more in-depth reviews, you can do them quarterly.

The most important part is to keep you tapped into your business, because the more you understand and the more you are aware of, the easier it will be to adjust and pivot as needed.

If you’re looking for help understanding the financial signals of your business, learn about our monthly bookkeeping packages!

Or maybe you just need a little direction now and then? Learn about our Ask a Bookkeeper 60-Minute Clarity Sessions!