Effective financial management involves planning, organizing, controlling, and monitoring financial resources. It is vital for business survival and growth. But, what’s more important is, making a plan to improve your financial position.
From creating a business to establishing an operation, you will go through different phases of growing sales, revenue, and gaining profits. However, if you don’t have a sufficient level of financial management, business growth will face drawbacks, profits may not grow with turnover, and it becomes harder to manage an organization.
In this article, we’ll see how to analyze your financial position and what steps to take to improve it.
How to analyze financial position?
Like an annual body checkup of a human is vital for survival, a yearly financial health checkup for a business is essential.
You need to answer a few questions:
- Did you meet the goals outlined in the business plan?
- Is there an opportunity for business growth?
- What are your plans for life’s unexpected events?
To analyze your financial position, you need to collate different financial statements, create an overall picture of your financial health, and draw your company’s current financial situation.
Ideally, you can use accounting software to create financial statements and get better insights into data. You can even take advantage of professional knowledge from 123Financials to help you develop statements and analyze financial positions.
Analyze your balance sheet
The balance sheet showcases a company’s financial position at a specific point in time, including assets, liabilities, and owner’s equity.
- Assets refer to what a company uses for its business operation.
- Liabilities include the money borrowed by a company that needs to be repaid.
- Owners Equity is the financing of owners into their business.
Assets = Liabilities + Owners’ equity
Analyse income statement
A company’s income statement shows its position and performance over time by considering its revenue, expenses, and profits. It provides information on growth in revenue over a particular accounting period, gross profit margin, net profit percentage, etc.
Analyse cash flow statement
The cash flow statement offers valuable information on how a company uses its cash during an accounting period. That includes money spent on business operations, investments, and other activities in the company.
The cash flow statement defines the liquidity situation of a company, its source of cash, cash flow, and whether the overall cash in the company increased or decreased.
Look into different financial ratios.
Financial ratio analysis assists you in determining the health of the company.
Here are certain financial health ratios to consider,
- To identify if your company has enough cash, assets, and low debt to run business
Quick Ratio = (Current Assets – Inventories)/ Current Liabilities.
- To determine if your business is financing its growth
Total Debt/Equity Ratio = Total Liabilities / Shareholders Equity.
- To determine your business’s ability to pay back short-term liabilities
Current Ratio = Current Assets / Current Liabilities.
- To understand if your business can convert its receivables into cash
Days Sales Outstanding = (Receivables/Revenue) × 365.
- To calculate how many days a company holds its inventories before selling them.
Days Inventory Outstanding = (Inventory /COGS)×365.
Ways to improve your business financial position
The first step to health strategy is, to begin with, a great plan with objectives for the company’s financial growth. Let us see some ways to improve your position:
Have a business plan
You must establish a clear business plan to understand where you stand and where you want to reach in the next few years. Write a step by step business plan by analyzing your reports, budget, opportunities, risks and other factors.
Monitor your financial position
It is essential to start by monitoring your position thoroughly. You can monitor your finances quarterly, monthly, or weekly and generate a better review of whether your existing business strategy is achieving your targets. It will help you gain better cash flow management.
Recover outstanding debt
If your business has outstanding debt, it is probably draining up your finances, keeping you out of cash for a prolonged period, and weakening your business position. You need to recover from the outstanding debt by collecting it yourself or considering using a reputable debt collection agency.
Reduce or rearrange expenses
Look out for the opportunities of reducing your expenses. However, there can be some inevitable expenses that you cannot avoid but look for other options like choosing a better bank, opting for cheaper options, etc., to reduce your unnecessary costs.
Sell unnecessary assets
Your company may have some items not been used for a long time and occupy space. Additionally, you may have to pay storage fees for stacking these assets. Instead, put them up for auction or sell them anyway and save your unnecessary expenses in storing and maintenance.
Maintain proper records
Having a proper accounting record gives you a better statement of the company’s position; it further helps you track late payments, understand debts, expenses, etc. If you are unable to keep up-to-date accounting records, you may risk losing money by failing to identify late customer payments or not recognizing your unpaid bills.
Offer markdowns or increase prices
You can offer full-price product markdowns to attract sales and move surplus stocks.
Increasing prices can impact your sales volume, but a slight rise can give you a better margin and improve your position.
However, both increasing and decreasing prices must follow the government legislation.
You need to control stock to ensure the right amount of goods is available at the right time. If you invest a considerable sum in creating unnecessary stocks and tying up your capital on them, you may not be able to spend the extra sum on the immediate needs of a business. Taking control over stocks frees up cash allowing you to have the right amount of stock available during demand.
- Consolidate your current debts.
- Use new marketing techniques like social media marketing.
- Provide additional payment options like credit, PayPal, etc.
- Look for government grants that encourage expansion, research and development, innovation, business growth, etc.
- Investing your own money can save your equity shares from investors.
- Tracking your cash flow statement and planning how to cover your expenses
- Applying for business financing and raising money with grants or crowdfunding.
Accountants can help to understand better ways to improve your financial position. Therefore, it’s advisable to meet professionals and scale your business to improve performance and financial health.
Your company deserves a health checkup annually, similar to your yearly health checkup with a family doctor. Depending on an annual business plan may not be sufficient to improve your position. You can also outsource your accounting tasks like recording daily transactions, preparing statements, analysing health, and others to accounting firms and save up money by hiring them with extra charges.