5 Signs of a Financially Healthy Business

As a business owner, it is incredibly important that you constantly assess and reassess the health of your company. Having a successful business is all about preparation and how you react to challenges, and if your company is showing signs of financial instability, then you probably need to make some major changes to right the ship.

On the flip side, confirming that your company is financially healthy can give you peace of mind, as well as the financial knowledge and confidence to take steps to grow and expand your business.

But how can you tell if your business is financially healthy? There are numerous factors that play into a company’s financial health, and just because you have customers walking through the door does not necessarily mean your finances are where they need to be. Below we’ve outlined five important signs that can serve to demonstrate financial health. Please be aware this is not an exhaustive list and it is not intended as legal advice for your specific situation. For a thorough analysis of your business’s financial health, please contact the business and bankruptcy Maxwell Dunn, P.L.C.

1) Revenue vs. Expenses

An extremely important sign of financial health is that your company’s revenue is consistently growing faster than your company’s expenses. Look back and track the numbers for both on a month-by-month basis. If your revenue shows growth each month versus relatively flat and consistent expenses, or if both are growing but your revenue is growing much faster, this is a good sign for your financial health.

2) Solvency

Take a look at your total monthly expenses and the total amount of assets you currently have access to. Then, calculate how many months your company would survive if your revenue stream suddenly stopped for some reason. The longer your company could last, the healthier it likely is. This is a subjective evaluation of your financial health since it depends on your level of comfortability with the number of months you would last until going bankrupt, but it is a key indicator of financial health nonetheless.

3) Long-term growth of cash balance

Consistent revenue growth is not enough if you are not keeping a healthy chunk of it handy. Some owners seek to reinvest their revenue too much, leaving themselves with lots of assets but not enough cash on hand for things like unexpected expenses. Positive long-term growth of your cash accounts is another great sign that your company is financially healthy.

4) Mix of repeat and new customers

If your revenue stream is coming from both past and brand new clients, this is a positive sign for financial health. This means you are not entirely dependent on one aspect of your market or another. If you had a drop off in repeat customers or in new customers for one reason or another, you would still have the other available to help get you by until you could correct the issue.

5) Profit Margin

How much profit do you make on each sale? Take a look at your net profits for the past year and then divide them by your total sales. This number directly reflects the profitability of your company. The higher your profit margin the better your financial health.

It can be highly beneficial to have an unbiased and knowledgeable business and bankruptcy attorney like those at Maxwell Dunn assess your company’s financial health. Give us a call to learn how we can help take your business to new heights.