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The importance of conducting a financial health check

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedMar 20232 min read

Regularly conducting a business financial health check keeps you informed as to the status of your company’s financials. The results will reveal where you can make improvements to your company’s financial performance, and help you prepare for any unexpected financial emergencies or downturns.

In our guide to conducting a financial health check for businesses, we explain the factors that need to be assessed in order to gain insight into the true financial health of your business.

Why a business financial health check is important

The economy has been unstable for some time now, and the effects of the pandemic are still being felt all around the world. The future is now far more uncertain than it was just three years ago, and conducting a regular financial health check on your business will ensure you are prepared for that variability and the inevitable ups and downs that it brings.

What are the ways to evaluate your financial health?

How much money the business is making is clearly the best indicator of financial health, but it must be balanced against how much money is going out of the business at the same time. The company’s ability to meet short-term and ongoing obligations must also be assessed, as well as its ability to manage and control costs.

This means there are three crucial factors to consider when evaluating a company’s condition during a business financial health check. These factors are:

net margin
liquidity and solvency
operating efficiency

Net margin

Net margin is the best indicator of financial health, even if the others listed below are also important contributors to a company’s financial situation. This means evaluating the ratio of net profits to total revenues.

Profitability is the ultimate aim of any business, and even though some businesses can survive for a time thanks to creditors and investors, they will eventually have to achieve net profitability or go under. But looking at the profit on paper does not always tell the whole story, so the net margin needs to be calculated to understand the true state of a firm’s profitability.

The larger the net margin, the more financial security the business has and the greater its capacity for growth and expansion. For example, a low net margin of just 1% reveals that the company could quickly find itself in a dire situation should operating costs increase, even just a little. Likewise, an increase in market competition could also see that small net margin disappear completely.

Liquidity & solvency

The amount of cash a company has, as well as any assets that are easily converted into cash, also reveals a lot about its financial health. Examining the liquidity informs one about the short-term prospects of the business via its ability to meet its immediate obligations. This ability is essential if the company is to have any long-term prospects.

At the same time as evaluating the company’s liquidity, its solvency should also be examined during a business financial health check. This is valuable because it demonstrates the company’s ongoing ability – or otherwise – to continue meeting future debt payments.

Operating efficiency

The operating efficiency of a business can tell us a lot, not only about its current financial health but about its prospects for the future too. This part of the financial health check involves calculating the firm’s basic operational profit margin after deducting the production and marketing costs for the company's products or services.

This factor is a good indicator of the company’s financial competence, and reveals how well the management is controlling costs. If the financial health check reveals good management at the company, then this is a good indicator that any future problems can be overcome. This, in turn, demonstrates long-term sustainability.

We can help

Improve your cash flow by automating payment collection with GoCardless, and turn slow and expensive methods into a streamlined and cost-effective payment collection process.

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.