2 min read
We all like to look to the future and what we’d like to achieve, but it’s important to keep an eye on the present, too. Every company wants to grow, but you need to constantly measure your company’s financial health to make sure you get there. Here’s how.
Financial health definition
Simply put, the definition of financial health is your overall ability to manage finances, including paying for expenses, building wealth and guarding against worst-case scenarios. For a business, the financial health definition can be expanded to refer to how strong and able your business’s finances are to keep you running smoothly.
There are several ways to check your financial health, including profitability ratios such as the gross profit margin formula. It’s important to know that financial health is about more than just turning a profit, it’s about making sure you can keep at it for the foreseeable future.
You can also use a financial health calculator to see how you measure up. These are available online and will ask simple questions concerning your level of confidence in your finances. A financial health calculator should be used as a casual self-help tool, not as professional insight into your company.
Essential KPIs for your financial health
Profit is important, but so is efficiency. Here are some key performance indicators you should be carefully monitoring to stay in good financial health.
The most obvious figure for financial health is your revenue, i.e., how much money are you bringing in? That said, you shouldn’t just be looking at the figure itself, but trends over time. Financial health goes hand in hand with stability, so if your revenue changes from month to month, it could be cause for concern. Look at your revenue at its highest and figure out what brought it to that plateau. Similarly, look at what you were lacking during times of reduced revenue and make sure you don’t repeat those trends.
Knowing what’s going out is as important as knowing what’s coming in, so keep track of your expenses. Accounting software can help you manage this more efficiently, helping you spot trends to improve your financial habits. For example, if you see that all your expenses are paid in lump sums at the end of the month, you could consider spreading them out throughout the month, so you don’t have a collective D-Day when it comes to bills.
Overheads can change all the time, especially if you rely on contracted workers and freelancers. Revenue is a crucial number, but you need to keep your overheads sensible if you want your revenue to stay healthy. Keep a constant eye on your overheads and consider cutting back if they seem to be getting too high. If you are unsure about putting overhead reduction strategies into practice, then calling in a consultant management accountant could be a good idea.
Client relationships and payment schedules
Keeping client relationships healthy is key to keeping business, and therefore profit, ticking over. But a client who doesn’t pay may not be one worth having so far as your financial health is concerned. Make sure you’re chasing invoices and getting the payment you’re due, so you don’t fall behind on your own debts. Software is a great option here, as several accounting solutions give clients the option to pay their invoices in one click. Plus, it allows for automated payment reminders.
Measure the average amount of time it takes you to get paid, and make sure it is well within the limits of the payment terms you set out. If you find you’re waiting longer than expected for payments you will have to increase your efforts at chasing them.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.