Financial Health-The Key to Successful Entrepreneurship

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It is believed that bookkeeping, forecasting, and planning is not just for start-ups. If you do this in an ongoing business, you’re going to grow 30 percent faster, you’re going to be more prosperous, and your statistics are going to mean more. Being an entrepreneur requires a sense of self-confidence and a firm faith in your idea so that you can have the nerve to capitalize in on a dream of your own, as opposed to living someone else’s dream in a regular job.

The financial aspect of starting your own company, though, tops the list of elements that need to be considered very cautiously and require proper planning, bookkeeping and monitoring. There are steps to guide you in better organization of your finances so that you can see your dream to its end, without its surrendering due to financial issues. Financial ratios are a useful and convenient tool for measuring a company’s performance and it’s financial position. There are many benefits to entrepreneurship. You get to be your own boss, work in an industry you’re passionate about, and acquire significant rewards if that business turns into a victory. Unfortunately, entrepreneurship often involves major financial risk and, without accurate planning, a failed business can also tank your own finances.

Here are seven signs that your company is in good financial health and a few guidelines on how to set yourself up to survive the worst-case scenario of your business going under.

 

1.    Your Income Is Growing

When viewing your profit-and-loss statement, you must be able to see a fairly stable increase in your profits month after month, year after year. It doesn’t have to be an enormous spike in profitability, but even just an increase of a couple percent shows upward movement and a strong financial viewpoint.

2.    Your Expenditures Are Remaining Flat

In concurrence with your income growing, you want your costs to stay uniform. If your business experiences a substantial growth spurt, then your costs may rise but, in general, this upsurge should be in-line with your increase in revenue.

3.    Your Cash Balance Exhibits Progressive Long-Term Growth

While you may be growing your revenue, if you’re taking that cash and simply financing it back into the business, you might find yourself asset rich and cash poor. A low or stagnant cash balance means your business is not maintainable. You want to keep a good quantity of cash in the bank so that if anything emergent comes up, you aren’t in a position of having to incur more debt to meet an unanticipated expense.

4.    Your Debt Ratios Must Be Low

There are two debt ratios to pay particular attention to: a business’ debt-to-asset ratio and it’s debt-to-equity ratio. For debt-to-asset ratios, maintaining a 2:1 ratio or lower is desirable.

5.    Your Profitability Ratio Is on the Healthy Side

One of the best ratios to calculate is your profit margin. This includes taking your annual net profits and dividing it by your annual sales. So, while you may be making sales, your profit margin could still be low depending on your pricing structure, startup costs, or other elements. Your profitability ratio is measured healthy when it’s on the high side.

6.    You’re Functioning with New Clients and Repeat Customers

The charge to acquire new clients is higher than the cost to work with the same customers over and over again. A stable stream of new clients and repeat customers exhibits that your business has multiple options for producing revenue. By having contact with new customers, you can help to isolate your business from changing attitudes and buying patterns.

Final Note

Evaluating the health of your business’ finances can be as simple as reviewing a profit-and-loss statement or as complicated as analyzing all of the different elements of your business bookkeeping. But, there is very little doubt that fully understanding your business finances is a sure way to remain successful and profitable.

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