Just as visiting the doctor regularly helps you maintain good health and spot potential issues early on, your business needs regular financial health checkups. This guide walks you through key areas—your business’s financial “vital signs”—and shows how to build lasting financial health.
Financial health vital sign #1: Cash flow
The money flowing in and out of your business is like its heartbeat—and without good cash flow, even profitable businesses can struggle. Here’s what to track:
- Money coming in: Every dollar coming in from sales, customer payments, and vendor refunds tells you how much money you have to work with. Tracking this helps you better plan for expenses and new investments in your business.
- Money going out. All money that goes to payroll, supplies, rent or mortgage payments, and other expenses needs careful monitoring to ensure you’re not spending more than you can afford. Understanding your expenses helps you make smarter decisions, including where to cut costs.
- Timing. Tracking when money comes in and goes out is essential so that you can plan to have cash on hand when bills are due.
Warning sign: If you’re often waiting for payments before you can pay bills, this is a warning sign that your cash flow is likely strained. (If this sounds like your business, Grow America’s comprehensive guide to finding and fixing cashflow challenges can help.)
Financial vital sign #2: Debt
Business debt can help power growth, but too much can put your business at financial risk. Knowing your total debt gives you a clear picture of existing financial obligations and helps you plan your financial strategy more effectively. Here’s what to track:
- Credit card balances. With their high interest rates and ease of access, credit card balances can quickly grow.
- Monthly loan payments. The amount of loan debt that your business carries, as well as the repayment terms, can either benefit or strain your cash flow.
- Debt-to-equity ratio. This shows whether there’s a healthy balance between what you owe and what you own.
- Owner-equity investment. This is the amount of money that you’ve personally invested or loaned to your business, which should be tracked with clear records to ensure you can eventually pay yourself back.
Warning signs: If you’re using credit cards without paying them off monthly or only making minimum payments, this can lead to excessive interest charges. If you’re missing loan payments or using new loans to pay existing loans (without a refinance benefit, such as a lower interest rate and/or a longer repayment term), you could be in a difficult debt spiral. In addition, missing loan payments can damage your credit score and make it harder to get beneficial financing when you really need it.
Financial vital sign #3: Profitability
Making sales is great, but keeping enough money after expenses is key. Tracking profit changes over time helps you spot trends early and adjust your strategy before small problems become bigger. Here’s what to track:
- Sales revenue. This can indicate the general health of your business—people want or need your products or services and are willing to pay for them. It also shows whether your marketing and sales efforts are working.
- Cost of goods or services. It’s important to track the cost of your products or services, price them correctly and maintain healthy profit margins.
- Operating expenses. Day-to-day operating costs need constant monitoring to prevent them from eating away at your profits.
- Gross profit margin. This tells you if your basic business model is working—whether you’re charging enough for your products or services.
- Net profit margin. This indicates the true health of your business after all expenses are paid—including your own salary.
- Monthly and yearly profit trends. Tracking these can help you understand changes in costs, competition, and market trends.
Warning signs: If you’re making a lot of sales but still losing money, it likely means your basic business model needs adjustment—shrinking profit margins often signal pricing problems or rising costs that need to be addressed. If your profits are decreasing but sales haven’t, then it often means your costs are rising and need attention. If there’s not enough money left to pay yourself after other expenses are covered, your business model won’t be sustainable.
Financial vital sign #4: Liquidity
Liquidity means that you have enough cash available to cover expenses during a slow month or two, or can handle an unexpected emergency, such as replacing a piece of smaller equipment. Liquidity is essential to help your business avoid taking on debt that can erode its stability and profitability. Here’s what to track:
- Cash in business accounts. This helps you handle unexpected expenses or opportunities without taking on debt. The total shows how many months you could cover expenses if you had no new income.
- Accounts receivable. The length and amount of your accounts receivable show if customers are paying on time, or if there are delays that should be investigated.
- Accounts payable. The length and amount of your accounts payable indicate if your business is improperly dragging out payments to vendors and suppliers to mask your liquidity issues.
- Emergency-fund balance. An emergency fund protects your business during slow periods or unexpected challenges—between 2-3 months of expenses is a good goal.
Warning signs: If you have less than two months of cash on hand and/or no emergency fund, then your business is vulnerable to unexpected challenges. If you have difficulty collecting customer payments, this impacts cashflow health and limits growth. If you delay bill payments beyond your terms, this can damage vendor relationships and lead to higher costs.
Financial vital sign #5: Assets
Your business’s assets are things of value that your business owns. They help you make money day-to-day and, if necessary, could be sold and converted to cash. For example, equipment, vehicles, and real estate are common business assets. Here’s what to track:
- Equipment and machinery. This includes the equipment or machinery needed to run your business, including production and operations.
- Inventory. This can be goods you purchase and/or goods you produce.
- Commercial real estate. This means that you own your building, rather than lease it.
- Vehicles. Whether you have a fleet of trucks or just one car for business use, vehicles are assets.
- Cash or investment accounts. These count when they’re owned by the business.
- Accounts receivable. This is money owed to the business.
Warning signs: If your equipment breaks down or your property needs repairs but you’re delaying this maintenance because of a lack of funds, you could lose sales, customers, and asset value. If your inventory is overstocked, you may be tying up money that could be used elsewhere. If you can’t afford to restock inventory because of a lack of funds, then you could lose sales and, potentially, customers.
Simple fixes for better financial health
1. Strengthen your cash flow
If cash flow is the heartbeat of a business, strengthening yours means that every aspect of your business will benefit. This Grow America guide to finding and fixing cashflow challenges can help you create short- and long-term strategies for a healthy cash flow. Here are some healthy tweaks you can start today:
- Bill customers promptly to maintain a steady cash flow.
- Offer small discounts for quick payments to get money faster when you need it.
- Spread out bill due-dates to better manage cash flow throughout the month.
- Build an emergency fund as a buffer for unexpected expenses or slow periods.
2. Control your debt
The right business debt can boost your business and position it for growth. The key is to reduce and, eventually, eliminate the unhealthy debt that weighs your business down. Here are some healthy tweaks you can start today:
- Pay more than the minimum due to reduce principal balances and pay off debt faster.
- Look for better interest rates for credit cards and loans to save you money over time.
- Only borrow for growth opportunities to ensure that your business debt is used productively.
- Keep business and personal credit separate to protect your personal finances and make accounting clearer.
3. Boost your profits
Over time, businesses often lose profitability. This can often be traced back to problems with either the business model or pricing strategy. Here are some healthy tweaks you can start today:
- Conduct regular price reviews to ensure you’re charging enough to cover rising costs.
- Closely track inventory to prevent waste and tie-up less cash in unsold products.
- Eliminate money-losing goods and services to focus resources on profitable areas.
4. Build liquidity
Often, it’s a relatively small amount of money that can get businesses into longer-term financial peril, like the amount needed to cover expenses for a slow month or two or to purchase or repair key equipment. To boost your business’s liquidity, here are some healthy tweaks you can start today:
- Start building an emergency fund today for protection from future challenges. Even small amounts add up over time. Be sure that the funds are easy to access when you need quick cash, but also that you don’t get into the habit of dipping into your emergency fund instead of finding other revenue-generating or cost-cutting solutions.
- Foster good lender relationships—these can be invaluable when you run into financial difficulties.
- Time income and expenses helps maintain healthy cash flow. If, for example, most of your customers pay their invoices at the end of the month, work with your vendors and creditors to see if you can have your monthly payment dates adjusted to accommodate your cashflow cycle.
5. Protect your assets
Your business’s assets serve multiple important functions, from enabling you to operate, produce and sell goods, and offer services, to building your balance sheet. To protect yours, here are some healthy tweaks you can start today:
- Ensure that equipment and real estate get needed maintenance to prevent costly breakdowns and extend useful life and value.
- Manage your inventory’s age to prevent waste and maintain product quality.
- Review your business insurance and upgrade your policies as your business evolves. Good coverage can protect you from unexpected expenses and losses.
Build healthy financial habits for a stronger bottom line
Just as regular health checkups help to keep you well, regular financial checkups give your business a stronger financial foundation. Make these part of your routine:
- Conduct regular reviews of everything covered in this guide. While monthly will be sufficient for some businesses, many will benefit from weekly reviews, especially if your business has been struggling.
- Invest in good bookkeeping software to save time and provide accurate financial information when you need it.
- Work with an accountant or professional bookkeeper for expertise and perspective you might miss on your own.
- Separate business and personal money. This makes taxes easier and gives you a clearer picture of business performance.
Moving forward
Your business’s financial health needs regular attention, just like your own health. By watching these key areas and fixing problems, you’ll build a stronger, more successful business that can handle challenges today and grow over time.
If you’d like to talk to someone who can provide insight into your business and its financial challenges, Grow America can help. For more than 30 years, we’ve helped small businesses as both a responsible lender and a trusted advisor.
We understand your challenges and can help. To learn more, contact Grow America today.