While there is no specific formula that will determine the financial health of your business, it’s relatively easy to determine if your business is financially healthy. Do you have a positive cash flow? Are you able to pay all of your expenses and overhead each month? Are you saving any funds?
However, certain successful businesses actually share several common qualities as discovered in the the “Small Business Financial Health Analysis” report – which was conducted by The Federal Reserve Banks of Chicago and San Francisco, Pepperdine University, and online lending resource FundWell. After analyzing more than 900 companies, the report discovered that financially successful businesses have strong finance knowledge, they have established a budget, are able to cover expenses, as well, a financially secure business has to have a bit of extra credit to spare.
With that in mind, here are five crucial tidbits that business owners should work toward if they want to make sure that their business is in strong financial health.
Learn Basic Financial Knowledge
One of the most common qualities that financially healthy businesses share is to have at least a basic knowledge in areas like financing products, financial planning and management practices. Even if you never dealt with the finances of a business before, having experience with personal credit can help your business thrive. Additionally, it has been found that more than “65% of businesses whom are in excellent financial health responded that they were very knowledgeable or extremely knowledgeable about equipment leases.”
While you don’t have to become an expert, business owners should have or learn the basics of business financing. There are an endless amount of free courses which you can take online to help you brush up in the financial area, or in a variety of other beneficial business knowledge areas.
A couple of recommended financial courses are:
- The University of Pennsylvania/Wharton: An Introduction To Financial Accounting
- The University of Pennsylvania/Wharton: An Introduction To Corporate Finance
- Columbia: Economics Of Money And Banking
- Yale: Financial Markets with Bob Shiller
Create a Budget
It should come as no surprise that healthy businesses are prepared and have planned out essential tasks like a budget. Shockingly, only 60% of respondents admitted to having created a budget. If you don’t fall into that 60%, you need to realize that budgeting is important since it ensures that you have enough money to cover your overhead and stay out of debt. A budget is paramount to helping you to prioritize your money and manage spending.
For example, a budget can identify wasteful expenditures that are draining your cash flow, which means you don’t have enough money to make payroll or handle utilities. Removing those expenditures can keep you afloat. A budget, as well, helps you know how much money will be going out, thereby leaving a way for you to tell quickly if you have a drain on your money where it shouldn’t be.
If you’re unfamiliar with budgeting, Credit.org has several free classes, such as Budgeting 101, that can assist you in properly planning out your budget.
Make Sure There’s Enough Money to Cover Expenses
An astounding “90% and 84% of excellent and above-average financial health businesses, respectively, had cash from operations to ALWAYS meet their employee payroll, payroll taxes, and health insurance/benefits obligations.”
If you’ve created a budget and have weeded out those unnecessary expenses, you should be able to cover all of your monthly expenses like payroll. It’s often recommended that small business owners have set aside enough money to cover expenses for the next 6 months, and sometimes an entire year.
While this can be a challenge, specifically for cash-strapped entrepreneurs, you can start planning for an emergency by starting out a little savings in a small way. Establish a payroll deduction that will automatically deduct a percentage of your paycheck and place it into your cash reserve. Make this a non-negotiable expense when creating a budget.
Don’t Max Out Your Credit
If you’ve personally experienced credit or loan debt, then you already know how difficult it is to not only pay down your debt, but also save money for an emergency. Furthermore, having a poor credit score impairs your chances of securing additional credit when you need it. The same is true for business owners, business credit relies on personal credit in the beginning. In fact, approximately 65% of businesses in poor financial health didn’t have access to additional credit.
While it can be tempting to max out your credit cards or credit line, or to take out a loan when starting a business, these practices make your financial well-being less sure. To borrow or otherwise use credit to keep you going when your business is struggling is going to put your financial health in jeopardy. Again, having a budget and being aware of the implications of debt, can ensure that you don’t burn through your credit if it’s not necessary.
Conduct Frequent Health Checks
Every month you should review three very important statements:
- Balance sheet. This will provide information like assets, liabilities, and net value.
- Cash flow statement. This will show you what money is coming in and how it’s being spent.
- Profit and loss statement. This compares what your business is spending and what it’s earning.
Besides these monthly reviews, your business also needs an annual checkup, just like you do when go in for an annual physical with your doctor. During this time, you want to make sure that you can answer the following questions:
- Have you met the goals that you have established for your business?
- Is there any room for growth?
- Is your revenue growing?
- Are your expenses staying flat?
- Is your debt to loss ratio at 2:1?
- Do you have an exit strategy or succession plan if the business has to be transferred?
The practice of continual learning about basic finance, having your budget solid, watching expenditures, and saving some cash each month are all ways to contribute to your company’s well-being. The added benefit to these practices is that they will contribute to your personal well-being as well.