Do your business numbers add up?
By Irene Chong
There are different metrics to see how well a business is performing. Here's how to check the financial health of your business.
It's important to check on the financial health of your business. There are different metrics to see how well a business is performing. Ultimately, it's all about whether or not your numbers add up.
The numbers not only track how the business or a product or service is performing, but also provide you with a heap of information to improve your business and keep it growing.
Checking your cash balance
Cash is a good measure of how the business is tracking. Is the amount of free-flowing cash in your business what you expected and enough to fund the operations? Not having enough cash for a sustained period of time may indicate some holes in your business and put in doubt the long-term viability.
If the amount of cash in your bank account at any point is different to what you expected, you should investigate the differences.
If there is less cash than you expected, it might become apparent that:
- The business has costs that weren't budgeted.
- There were instances of employee fraud at the register.
- There were errors in your accounts payable department where double payments have been made to suppliers.
- There is a need to chase down customers who don't pay on time to ensure there's enough free-flowing cash in the business.
While having too much cash might not seem to be a problem, you might discover that:
- There are invoices you have missed - if you keep missing payments, this may dampen the relationship you have with suppliers, or
- You have missed tax payments, employee superannuation payments or payroll tax opportunities, which can lead to interest and penalties and impact your credit rating.
Does the inventory balance reflect your purchases and sales? Having too much stock on hand can be an indicator that sales are slowing. Think about whether or not you can move the stock and realise profits or if you need to provide any discounts or write off stock as obsolete. Monitoring your stock balance can also help you manage how much stock you purchase for sale at any one time to ensure you don't pick up unnecessary storage and transport costs - the lower the costs, the higher your profit.
Whether it's plant, equipment, office furniture or motor vehicles, check the assets you have are in good working order and continue to be used by the business. Your assets are used to run your business, so it makes sense to keep them in good nick.
Liabilities and expenses
It's always important to make sure your expenses are in order. Check that the costs incurred are in line with what was budgeted for. If the costs exceeded budget, understand why that was the case and whether there is anyway to correct it. Where the costs were less than budgeted, consider if the same savings can be applied in other parts of your business.
Also keep on top of your liabilities. Whether they are amounts owed to employees, the ATO or suppliers, part of running a successful business requires staying on top of your payments.
It is important to regularly review the numbers and make sure that everything adds up. Getting your balance sheet to balance can highlight deficiencies in your business, detect fraud and keep the relationship with customers, creditors or employees strong. Take the time to make sure your numbers add up.