Determining the financial position of your company is an important process in mapping out the next steps that your business will take towards the fulfillment of your business goals. Without it, you will be making decisions that might open your business to more vulnerabilities.
The same goes for failing to determine your financial position correctly. The wrong financial position will give you the wrong impression and ultimately the wrong business plan. Here are some tips to help you determine the financial position of your small business:
Having a tight grasp of your gross margin, net income, and your profit before 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.
Another surefire way to know if your business is financially stable is by analyzing the trend of your cash position. A positive cash flow 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.
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.
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 stabilizing your financial position.
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. All these assets should be included in order for you to publish an accurate financial position statement.
One key task in determining the financial position of your company is having updated books. Keeping your books regularly updated helps you to determine your financial position faster, without going through the trouble of checking if your balance sheet and other financial documents are accurate.
The financial position of your company speaks volumes of the economic viability of your business and whether potential investors will indeed gain profitable returns if they invest in your business.
This article was first published 11 February 2015 and edited 24 January 2021.