Check your small business financial health

Can you even believe we’ve made it through one full financial year of COVID-19? And with lockdowns still happening, even as we transition into a new financial year, small businesses continue to struggle. 

A few weeks ago we wrote about the importance of small business owners keeping an eye on their mental health. Now it’s time to turn our attention to the business itself. With the end of financial year madness out of the way for the moment, why not do a small business financial health check to identify issues sooner rather than later. As they say, prevention is always better than cure.

What is a financial health check?

A small business health check is like a physical for your business. Or taking your car for its annual tune up. It’s scrutinising the financial side of your business. The aim is to identify potential issues before they turn into problems, see how your business has managed financially over the last twelve months and to make sure you’re still headed in the right direction.

When's the best time to put your business through a financial health check you ask? While they can be done at any time and will benefit you and the business regardless of when you do it, we recommend starting the new year (or new financial year) organised and ready to go. Even before the end of the financial year can be a good time as well so you can take advantage of those last minute EOFY deals and tax incentives. In short, there's no right and wrong time to complete the health check, because whenever you decide to complete the check, it will set a positive tone for your business into the future. 

What your financial health check should cover

Financial ratios

Determining your business baseline is a great place to start and you can do this by using a few main financial ratios: 

Liquidity 

How quickly can you turn assets into cash? This makes it easy to tell if your business can pay its bills when they fall due. For most small businesses, it’s better to hold more current assets than current liabilities. This suggests your business can pull through a time when cash flow is tight. 

Profitability or Return on Investment (ROI)

Measures your business performance and is really how you verify the level of success of your business. You may even want to compare your gross and net profit margins with similar businesses. This can help you spot opportunities to streamline or improve your business practices. 

Leverage 

Indicates how reliant your business is on debt financing as opposed to using equity to fund the business. Leverage ratio = Total liabilities / Equity and as a rule of thumb, the higher the ratio, the more challenging it will be to raise further finance.

Solvency 

If cash flow was reduced, could your business continue to meet its debt and financial obligations? 

Cash flow 

Cash flow is the money that comes in and then goes out of your business. There’s nothing more important to your business, and no better way to check your business financial health, than cash flow. Understanding how to manage cash flow should be a business priority. To help you tame the cash flow beast, we’ve put together our best tips.

Cash Flow Tips: Keep money coming in 

Avoid cash flow problems by ensuring your business is making a profit. To keep things moving, once a month and at the end of each financial year, complete:

• balance sheet
• profit and loss statement
• cash flow statement

Improve your cash flow 

Improving cash flow could be as simple as tightening up some existing operational processes, such as:

• invoice customers straight away and follow up when they’re late paying
• give customer lots of payment options (credit or debit card, Stripe etc) and offer discounts for early payments 
• ask for deposits or first instalment payments for large jobs or orders
• check rostering so staff are there when you need them (and you’re not paying them if they’re not needed)
• manage stock and suppliers and have systems in place to alert to low stock levels
• take advantage of extended payment options. It’s money in (your) bank.

Do a cash flow forecast 

A cash flow forecast allows you to make sure you’ve got enough cash to run the business. Allowing you to predict future sales and expenses. It will also let you know if there’s more money going out than coming in.

After you’ve done your forecast, go back and compare it to what the actual cash flow for the period was. This is important as it can help identify where you’re doing well and what can be improved and how you can do that.

Strategic reviews

When it comes to your business’ financial health, you want to ensure you’re not settling and instead you're partnering with a financial team who really understands small business. The Kelly+Partners team of business accountants are just a phone call away.

Do you have a business mentor who can help you look over things and offer advice? Speaking with others who know what you’re going through can help you make tough decisions and also celebrate your business wins.

Keen to compare your business to other similar businesses?

The Australian Taxation Office (ATO) app has a snazzy small business benchmarks feature. The ‘benchmarks are a guide to help you compare your business's performance against similar businesses in the same industry.’

Benchmark ratios are released each year with the most recent data from the 2018–19 financial year. 

You can find the business performance check tool by:

• downloading the ATO app from the Google Play or Apple App Store

• going to Business

• selecting Business performance check.

Have your business information ready and enter the figures into the tool.

You can then compare your business performance.

If reading this has made you realise you might need some financial help, you’re not alone. Our team of professional financial advisors can help turn your annual small business financial health check into something you look forward to doing.