For many medium sized, family owned, entrepreneurial businesses the time invested by owners and management can be on the operational matters. The day to day challenges that come with running a successful business, building relationships with customers, securing reliable and efficient supply chain, fine tuning and stream lining operational processes can be very time consuming.
Of equal importance and key to the overall success of a company and enabling it to achieve its business strategies is its financial health. Some of the key areas to review within your business include;
Profitability – the most fundamental and widely used measure of successful trading, it is often measured as the level of gross profit and net profit. However, the percentages of gross and net profit of the company should be calculated to indicate the level of return based on the turnover of the company.
Liquidity – as well as being profitable a company needs to have liquidity, being sufficiently cash and cash equivalent assets to meet the obligations to pay the bills as they fall due in the short term. Liquidity can be measured with the current ratio or quick ratio.
Solvency – refers to the longer-term viability of the company, its ability to meet the long term financial commitments. Measure of solvency can include a comparison if the total assets to total debt, debt to equity ratio and also its ability to service any debt measured by interest cover ratio.
Other metrics provide essential financial health information to management depending on the nature of the business. Completing a review of aged debtors and creditors regularly and for retailer’s calculation of stock turn.
The results of the above review can indicate if a company is ready for capital investment or growth strategies the management may be planning. It can also act as a preventative control, raising a warning flag for a potential risk to the company’s success.
For more information please contact Linda Doran.