When can you confidently say that your business is doing well financially? Of course, revenue alone is not an accurate indicator of your business’ financial health.
To evaluate the financial health of a business, one would typically scrutinise its liquidity, solvency, profitability and operating efficiency.
Regularly monitoring and analysing those components is good practice for any business to maintain a predicted growth trajectory and to avoid any unwanted risks in the future.
Here are 4 tips for checking the financial health of your business.
1. Having a real-time business analysis
Real-time financial softwares are widely used today by businesses to make informed management decisions on an ad hoc basis.
These softwares enable quick access to key information on your business such as inventory, sales and profit information, which can then be used for analysis and preparing reports on cash flow liquidity and solvency.
Access to real-time information will give you the ability to react quickly and resolve any issues as they arise.
In a competitive business environment, your reaction time to the information you receive is essential to make your business stand out among the rest.
2. Setting up a budget and comparing it to actuals
All businesses put a significant amount of time and effort into their financial planning and analysis.
One way of doing so is by performing an analysis of budget vs actuals variance, which is used as a tool used to see whether or not a business is staying within its predicted financial trajectory.
By analysing the budget of a business against its actual revenue and expenditure, the financial health and solvency of the entity becomes clear.
However, the efficiency of this process depends on the systems used by the business. For example, if you rely on spreadsheets for conducting your analysis, needless to say it will be a very time consuming process.
In this case, using a software to keep track of your finances would greatly benefit your business by saving time and money.
3. Identifying a risk spectrum
A big part of managing a business involves identifying and managing risks. That being said, it is not always possible to avoid risks before they become reality.
Even if an unwanted circumstance has arisen, a well-prepared business will be able to quickly identify the risks and handle the issue so as to reduce the negative implications it may have on revenue, productivity and customer satisfaction.
The ability to identify risks depends on the team’s ability to analyse the activities and transactions carried out by the business and thus be aware of the threats present in the industry.
The risks and threats faced by businesses are likely to be preventable and can be managed with strategic planning based on the specific business profile.
4. Seizing investment opportunities
Once you have optimised your financial management and budgeting, your business should be presented with a variety of opportunities to continue growing.
The financial health of your business will not be a helpful indicator unless you use it to take strategic steps to grow your wealth and your business.
Investment opportunities such as stocks, property and land come with their own risks but are necessary to ensure that your business is moving forward instead of backward.
If you have any questions about the types of financial software you could use in your business financial reporting and analytics, feel free to contact us on our website.