As a business owner, you are ultimately responsible for the financial health of your company. That means paying your employees, your suppliers and keeping your business up and running all depends on your financial management skills. Keeping a company in good financial health takes quite a lot more than just glancing at a bank statement. Learning what the warning signs are and how to spot any potential problems before they arise is the best way to keep your company in sound financial health.
1. Measure Your Debts
One of the most potentially devastating warning signs of poor financial health is a significant level of debt. As a business owner, it is your responsibility to have a clear understanding of your business‘s debt. The most effective way of understanding your company‘s debt is to measure two key indicators: your debt-to-equity ratio and your debt-to-assets ratio.
As the name suggests, the debt-to-equity ratio measures the level of debt in your company compared to your total equity. To work out your debt-to-equity ratio, you will need to divide the total sum of your debts by the amount of equity you have. The debt-to-asset ratio works in a similar fashion, you divide the amount of debt you owe by the total sum of your company‘s assets.
2. Track Your Profit Margin
You must always remain aware of your key performance indicators, like your profit margin; otherwise, you risk running into big financial problems later down the line. The most effective way of better understanding your profit margin is to calculate your net profit margin. To do this, you will need to minus the number of your total costs from your net profit. Then, take the remaining number and divide it by the total amount of your revenue. The number you are left with is your net profit margin.
3. Know Your Solvency
What’s dangerous about Sole trader insolvency, is that when a business owner is not aware of their current level of solvency, they can end up running into major problems later down the line. Your level of solvency refers to the amount of money in your business bank account, minus the monthly expenses. When you work out your current level of solvency, you will understand how long your company would be able to survive, if all sales and incoming capital suddenly stopped. This is a very useful indicator to have as it shows you how financially stable your company is.
4. You are Unable to Make Payments on Time
Not all warning signs of poor financial health come in the form of accountancy statistics, as others are much more obvious. If you regularly have to pay your employees or suppliers late, you are likely to suffer serious issues with your cash flow. As a business owner, it is important that you take notice and work to rectify these issues as soon as possible. Regularly paying your employees late can have a big impact on your company‘s working culture, employee health, and employee turnover rates.