Maintaining a company's financial health is one of the biggest challenges for small business owners. Maintaining a good operating cash flow and net income can be an uphill battle, particularly in challenging times like these. As a small business owner, you need to take proactive steps to ensure your company's cash flows are maintained and financial viability is kept up. Keep reading for our guide to keeping up financial viability in your (small) business.
Evaluating financial health
Keeping an eye on your business's financial health can be overwhelming amongst running your company's normal business operations. This is why it is crucial to have an understanding of key ratios and metrics to look at regularly. These include your debt/ equity ration, current ratio, day sales outstanding, quick ratio, and days inventory outstanding. There is quick formulas to calculate each of these ratios.
Areas of improvement
A key area of financial planning is to look at unnesseary spending to cut out. How much money is going out that could be reduced without any detriment to your operations? This could eg entail a change of electricity tariff or outsourcing services such as IT support.
Most important metrics
In order to improve your positive cash flow long-term, it is crucial to set key performance indicators (KPIs). This will help you and your team understand your company's financial health and long-term viability.
Amongst your KPIs, there is one metric to keep an eye on: your profit margin. If your top and bottom line are too close together, it is advisable to take measures to improve cash flow.