Good financial management covers a lot of concepts and comes with a lot of considerations. Understandably, getting around financial terms is not a cakewalk for everyone. However, anybody can start with basic concepts and gradually master all money matters. As an entrepreneur or a business manager, you must always strive to enhance your financial skills for making better business decisions.
An investment is one such decision, and it naturally requires careful evaluation. While investing, we often encounter the term “financial health”. So, what does it mean by msme loan apply? Why is it important for a company? Let’s find out.
What is the financial health of a company?
To own or run a business, you must understand how it performs and the parameters to gauge its performance. Financial health is the most critical parameter and it plays a key role in allocating resources or determining plans. There are certain factors that are indicative of the financial health of any company. If a company has sufficient cash to fulfil various business requirements, it has a good liquidity. It can pay back lenders on time and earn adequately for its shareholders.
If a company manages to do this without going bankrupt, it is solvent. Finally, the main goal of any business is generating profits and profitability is a key indicator of financial health. Another aspect to consider is the efficiency of operations.
In a nutshell, a company is considered financially healthy if it is liquid, solvent, profitable, and efficient.
How to determine the financial health of a company?
There are several ways to determine your company’s financial health. First, start by analyzing the balance sheet. The balance sheet provides information about the assets, liabilities, and owner’s equity. You can gauge financial performance by examining income, expenses, and profits. These figures are available in the income statement. Cashflows provide insights into the liquidity, sources of cash, and investments. Studying the cash flow statements can help you to analyze the business’s financial health.
Factors affecting the financial health of your company
- Profits – Examining the profits helps you to understand the potential for growth and consolidation. Steady gains represent sound strategic decisions. Understand the net income ratio to get to the bottom line.
- Expense Trends – Profits are always negated by expenses. Profits will be rendered meaningless if costs mount. Reduce spending and optimize investments to ensure business stability and growth.
- Working Capital – The definition of working capital is current assets minus current liabilities. A business cannot function smoothly with negative working capital.
- Accounts Receivable – Your business must collect receivables on time. The inability to manage them may lead to dependence on secured or unsecured Business Loans. Ensure credit policies are in the right place. A financially healthy company ensures that the ageing of receivables is under control.
- Fixed Assets – Fixed assets require investments. A business may need substantial fixed assets like property, plants, or equipment. But the requirement has to be justified. Underutilized equipment can mean that the demand planning is incorrect. It can also be an indicator of declining demand in the market.
- Inventory Status – Maintaining the right amount of inventory ensures your business runs optimally without risking any failure to supply. While not having enough inventory can be detrimental, excess inventory can create a set of other problems. It can become outdated; storage and insurance will increase costs. On top of this, it can also indicate higher product returns or unhappy customers.
- Business Environment – A conducive environment is critical for your business to succeed. The culture of your company needs attention. The external environment is also dependent on several political and economic trends. Depending on the nature of your business, examine the environment from a domestic and international perspective.
- Debt Management – Managing your company’s debt is crucial for survival. Ensure you maintain a healthy credit score. This can be achieved by making timely debt payments.
- Customer Loyalty – Customer retention is vital to a business’s success. Along with retaining customers, you need to focus on acquiring new ones as well. Develop strategies to attract new customers and strengthen your relationship with existing ones.
- Competitive Advantage -To beat the competition, you need to know it first. Keep a close eye on your competitors and if they are doing better: learn by studying their business ethos and try to adopt some of their best practices.
Act on Insights
Several indicators can help you ascertain your company’s current financial health and future prospects. Understanding financial statements and metrics can go a long way in improving your company’s financial health. Gather insights and act on them.