We’ve said it before and we’ll say it again: strong finances are important. After all, without good finances, how will you pay your employees, take care of debts and ultimately make a profit? Your business depends on finances to be successful, so making sure they’re healthy should be a top priority.
Here are six signs your business is financially healthy.
- Your revenue is growing – This one might seem a little obvious, but it’s important nonetheless. When looking at your financial statements, you want to see a relatively steady increase in your revenue, whether it be weekly, monthly or even yearly. It doesn’t have to be a big increase either – just a small, steady change can show good health. You know what they say, slow and steady wins the race! Not only do you want to see your revenue growing, but it’s also a good sign if your cash balance is showing growth. Cash is necessary for the operations of your business, so a growing balance can help ensure you’re prepared for any surprises that may pop up.
- Your expenses aren’t growing – In order to be profitable, you need your revenue to be in excess of your expenses. To do that, you want your revenue to go up, while your expenses remain the same or even decrease (bonus points if your expenses are decreasing – that’s no easy feat!). While expenses may increase with growth, it’s likely your revenue will increase as well. Growth in your expenses is healthy as long as it’s proportionate with your revenue growth.
- You’re gaining market share – Whatever you’re doing, it’s working. Whether you’re offering a product or a service, people like it and are likely telling others about you. Because of this, you’re gaining more customers and staking a larger claim in the market. You wouldn’t be able to see this remarkable growth if it wasn’t for your financial health allowing you to make changes and adapt to the ever changing needs of your market.
- Your ratios are looking good – There are multiple ratios to pay attention to that can determine if your business is financially healthy. You want your debt ratios, debt-to-asset and debt-to-equity, to be low. These ratios basically tell you how much you owe in comparison to how much your business is worth or how much cash you have available to pay off debt. Ideally you’d want a high profit margin or above average for your industry (not all business are striving for the same profit margin), as it shows your sales are resulting in a high amount of profit. Finally, you want high turnover ratios. A high inventory ratio can signify you’re efficiently and effectively pushing inventory out the door instead of keeping it holed up in the back, while a high asset turnover can signify effective asset management.
- You’re retaining the right employees – Your people are at the heart of your business, and they’ve helped your business become what it is today. However, they likely wouldn’t have been able to stay on board if your business was struggling financially. When your business is financially healthy, you’re able to pay your employees (which is pretty important) and can often times provide added perks and bonuses to keep them around. If you need some ideas for keeping employees engaged and coming back for more, check this out!
- Your strong cycles support you throughout the year – If your business is in retail, your busy season is likely during the holidays. If you’re a service provider, your busy season depends on what type of work you do. Your business shows strong financial health if the revenue from busy season can carry you through the slow times. How? If this revenue carries you through, you likely have high enough balances in your accounts to support you all year long, rather than waiting for (and desperately needing) busy season. Pro tip: just because you have a healthy balance doesn’t mean you should go spending all the proceeds from busy time – you’ll still want a cushion for emergencies or new expenditures.
It’s no secret understanding your finances and making sure they’re in tip top shape can help your business grow and become what you dreamed for it. Check in on your business and see how your business is doing with these six pointers – we bet you’re doing great!