Financial Health: What It Is And How To Assess It
Financial health is a critical foundational element of any business. However, companies aiming to use business as a force for good have significantly more at stake than businesses running purely for profit. Your purpose and mission are the core of your business, so ensuring your company’s continued survival and success is critical.
But what is financial health in the first place? What metrics should you be tracking, and how do you assess them? In this piece, we'll discuss these concepts to help you determine your company's financial health.
What Is Financial Health?
Financial health is your company's ability to generate enough revenue and profit to sustain itself. You can also use it to indicate how well you manage your cash flow and other resources.
Benefits of Analyzing Your Company's Financial Health
Businesses must regularly assess their financial health. However, a mission-driven company aiming to succeed has to be more intentional about the analysis. As a company with a purpose beyond profit, you have more at stake than your bottom line.
Here's why you need to assess your financial health regularly:
1. To Identify Areas Of Strength And Weakness
By examining your financial health, you can identify areas of strength or weakness in your business model. Understanding your company's strengths and weaknesses can help you create better business and financial strategies.
2. To Make Informed Decisions
Assessing your company's financial health can give you the information to make better decisions. Having more information is especially important when budgeting and allocating company assets.
3. To Assess Your Company's Risk Tolerance
Knowing your financial health also gives you an indication of how much risk you can handle. Understanding risk is essential for mission-driven companies like yours. After all, you want to ensure financial security even when taking on risks.
4. To Work Toward Your Mission
Lastly, assessing your financial health helps you work toward achieving your mission. Regularly monitoring it will help you measure progress and make adjustments if needed.
How Can You Determine Your Company's Financial Health?
Determining your company’s financial health requires looking at various metrics and assessing them. Here are some key metrics that you should track:
Revenue And Profits. Tracking revenue and profits is a good indicator of your company's performance. It will help you identify any areas of improvement or potential growth opportunities.
Cash Flow. Having a good handle on your cash flow is essential. It will help you ensure that you can cover your expenses and invest in future projects.
Debts. Knowing how much debt your company has is vital. After all, it can affect your ability to take on more debt or get additional financing.
Assets. Knowing what kind of assets your company has and their value can also give you a better indication of your company's financial health.
Profit Margin. Looking at your company's profit margin will give you an indication of how efficient your operations are.
Liquidity Ratio. This ratio measures your company's ability to cover short-term liabilities. Track this regularly to ensure you have enough cash on hand should the need arise.
It would be beneficial to analyze other indicators, such as customer satisfaction, employee morale, and market share. All these factors can give you a better idea of how your company fares financially.
1. Customer Satisfaction. Tracking customer satisfaction is vital for any business. It will help you understand how your customers view your company and its products or services.
2. Employee Morale. The morale of your employees will have a significant impact on the overall performance of the company. After all, your employees are your partners in achieving your mission.
3. Market Share. Monitoring your company's market share can help indicate how well your products and services compete in the marketplace.
How To Improve Your Company's Financial Health
Once you have determined your company's financial health, the next step is to take action. Here are some steps that you can take to improve it:
1. Make Appropriate Adjustments
Look for and make appropriate adjustments to your business model. That could include reducing overhead costs or increasing revenue streams.
2. Talk To Your Team
Make sure to involve your team when making changes. It will be easier to implement the necessary adjustments if you have their input and perspective.
3. Analyze Your Data
Use data analytics to determine where you are financially and identify areas that need improvement.
4. Track Your Progress
It is essential to track your progress to see how your sustainable business is faring. It will help you know if your strategies are working or not.
5. Invest In Training
Investing in training can help improve your team's efficiency, which in turn helps improve your company’s financial health.
6. Find New Sources Of Revenue
Explore new opportunities and potential sources of revenue to increase profits and cash flow.
7. Outsource CFO Services
If you don't have the capacity or expertise to manage your finances, consider outsourcing CFO services. They can help you gain better insights into your company’s financial health and make more informed decisions.
Determining and improving financial health is essential for any business. For your company, having a handle on your finances helps you make informed decisions aligned with your mission. Your company’s financial health can help you determine how your business is utilizing its assets and resources. And of course, those resources should be put to work furthering the impact you want to make.
To do this, you need to track key metrics and take proactive steps to improve them. Get a better understanding of where you stand financially and move forward.
At Profit Reimagined, we understand that your ideal of making an impact is the heart and soul of your company. We aim to do more than just provide virtual CFO services; we take the time to understand your mission and vision to create financial strategies that truly align with your company. Book a call with Profit Reimagined now if you need a virtual CFO, or visit our website to see our mission and how we help women in business like you. We have a vision of a better world. Let’s make it happen.