How to Know if Your Business is Financially Healthy

business lending business success Apr 22, 2024

Financial health and physical health have a lot in common. Both can seem fine one day only to be in rapid decline the next. We may only be one emergency away from desperation without really knowing it.

Before you get to desperation, take your business’ temperature to see if it’s in good financial health. Here are the top five signs you should look for:

  1. Steady Revenue Growth. Depending on your business, you may enjoy seasonal spikes in growth, but that doesn’t necessarily represent dependable, year-after-year growth. Review your profit-and-loss statement. You should see a steady, almost predictable rise in monthly and yearly revenue. The more data you have, the more you have a finger on the pulse of your business’ health.
  2. Low Debt Ratio. Debt plays a major factor in determining the overall viability of your business. By comparing your debt-to-asset and debt-to-equity ratios, you’ll begin to see a better picture of your business/ financial fitness. While debt-to-equity rations vary significantly from industry to industry, a good starting point for a debt-to-asset ratio is typically 2:1.
  3.  Steady Expenses. As revenues increase, keeping your expenses flat or near their previous averages only increases profitability. Beyond a restructuring of goods and services and outside periods of drastic growth, if increasing expenses outpace increasing revenue, there may be trouble ahead. Keeping your expenses steady as revenues rise is a sign of good financial health.
  4.  New Customer Acquisition. New customers today become repeat customers tomorrow. Your trusted customers know you’re the person to come to, but new customers should make you jump for joy. An increase in new customers should signify healthy gains on the horizon.
  5.  Money in the Bank. Although it’s wise to reinvest revenue into your business. depleting your cash balance in favor of improving operations or expanding business may actually harm your business’ health. Over-investing in assets at the expense of your bank account can leave you scrambling in case of an emergency or an unpredictable change in the industry.

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