The role of a business owner is multi-faceted, from delivering a service, maintaining company operations and keeping company finances in check, to business development, business planning and marketing – the list goes on. You’ll need to put on various hats within a moment’s notice while ensuring the business is always in sound health.
Financial health of your business must be at the heart of every decision as this contributes to positive cash flow which is essential to the daily running and maintenance of your business. A health check gives you the chance to spot any red flags that could threaten business health.
Shaun Barton, a company liquidation expert at Company Closure runs through conducting a health check on your business, warning signs to look out for and the support available, should your business require help.
Performing a health check on your business
If you have an accountant, they will actively track the health of your business to ensure that you’re operating efficiently and keeping within budget. If your business veers off course and enters dangerous territory, they will raise the alarm bells to inform you of any threat to business viability.
As a business owner, it’s essential to understand what makes a healthy business and the warning signs to watch out for, should your business take a turn for the worst. This knowledge can help you avert a crisis by seeking professional help at the right time.
We look at how to perform a health check on your business, the areas that must be closely tracked and the warning signs to watch out for.
Balance sheet – Your balance sheet shows how much cash is in the business at any point. It provides a brief breakdown of company debts, assets and the owner’s equity, i.e., their share of the business. The debt-to-asset ratio shows how much the business owes and how much it is owed.
Sales forecast – Your sales forecast provides crucial information relating to the financial potential of your business and essential points of comparison for trends and sector demand. If your sales forecast shows that business turnover is on an upward trajectory, your business is on track for growth.
Cash flow – Cash flow is essential to oil the wheels of a business, so if this is in shortfall, it’s likely to act as a catalyst for disruption. Cash flow is used to fund the daily outgoings of a business and maintain company operations. Without sufficient cash flow, a business can grind to a halt. If cash flow is low, this must be replenished before the business runs into serious financial difficulty.
Debt collection – If you’re waiting to cash in on overdue payments, your business could be at risk of bad debt. Bad debt refers to payments that are unlikely to be paid and therefore, likely to be written off. An increase in bad debt could seriously deplete cash flow and chip away at your bottom line. If this is apparent in your business, it’s time to step up your credit control strategy.
Business credit score – Your business credit score grades your spending habits, borrowing behaviour, and financial maturity. It’s used by lenders and financial institutions to support lending applications and determine borrowing limits and interest rates.
If your business has a positive credit score, there’s less risk to the lender, which means you’re likely to have access to competitive rates. If you have a poor credit score, and therefore, pose a greater risk to the lender, you’re likely to be offered less at a higher interest rate.
If you’re a new business with limited to no credit history, it will take some time to build a credit record and remember that your business credit record is separate from your personal credit record.
What happens if my business is in the red?
If any of these factors are in the red, protect the financial health of your business by reaching out for support. Finetune the way your business operates to make necessary cutbacks and increase efficiency. If the business is beyond this stage, speak with your accountant about making immediate changes or an insolvency practitioner to take control of unmanageable business debts.
If you would like to discuss this and how we can help you please get in touch.
