In this day and age, taking anything at face value is a risk that perhaps no business owner in his right mind would be willing to take. This further emphasises the importance of SME valuation or the estimate of the net worth of your business.
As it is, valuation may sound a little too complex but by taking little steps to figure out your financial position, you can get through valuation in a breeze. Here are some useful tips to help you determine your financial position:
1. Basic understanding of your critical numbers
Having a tight grasp of your gross margin, net income and your profit prior to tax and depreciation gives a clear picture of your critical business numbers. Your distinct familiarity with your critical business numbers will make it easier for you to reflect these figures in your financial statements, In turn, your financial statements will be the tangible representation of your business net worth.
2. Cash position check
Another surefire way to know if your business is financially stable is by analysing the trend of your cash position. A positive cashflow indicates increased revenues. Keep track of the areas that give you higher profits and zero in on them when you decide to expand your business.
3. Solvency optimisation
Solvency simply means your commitment to your long-term financial obligations; this is also equated to the life expectancy of your business. In a nutshell, the solvency of your business will be strained if your cash outflows are greater than your cash inflows. Ideally, you should set a very realistic expectation to be on your way to stability and profitability.
4. Tracking overhead costs
Overhead costs pertain to your fixed and regular expenses such as taxes, payroll, and insurances, among others. Projecting these monthly costs over a year or two could give you an accurate view of what you should actually spend on. Be cost-effective by eliminating unnecessary purchases while stabilising your financial position.
5. Asset inventory
There are other factors other than money that could serve as metrics for your financial position. Aside from current assets such as your working capital and your inventory, what else does your business own? Properties, machines and vehicles count as non-current assets which also add up to the actual net worth of your business.
Your financial position speaks volumes of the economic viability of your business and whether potential investors will indeed gain profitable returns if they invest in your business.
Need help in determining your financial position? Get in touch with our financial advisers at D&V today!