Is Your Business Due for a Financial Health Checkup? How to Check

A financial health checkup is a thorough evaluation of a business’s financial well-being, much like an individual’s routine health checkup. Simply put, you want to make sure that everything is working as it should be and, if not, take the necessary actions to fix it. More than a basic profit and loss assessment, financial health checkups evaluate financial indicators, liquidity, and debt ratios.

Anyone can benefit from a financial health checkup, but here are a few examples of situations where it might be the best move:

• Businesses that are scaling and rapidly growing
• Companies experiencing changes in management or ownership
• Businesses taking on more investments or loans
• Companies with financial concerns

For small businesses, every financial move can significantly affect their financial health. A comprehensive financial health checkup can provide a solid foundation for stability and growth, strengthening their ability to overcome present challenges and future setbacks.

Taking a systematic look at the complete state of your finances has many benefits, including identifying these red flags to prevent financial issues in the long run.

• Consistent cash flow issues: If you are unaware of your financial health, you can spend more than you earn, leading to insolvency.
• Mounting debts: When the debt-to-equity ratio is high, it can mean you have a poor borrowing strategy. A financial health checkup can show you where liabilities heavily outweigh assets.
• Declining gross margins: Lower gross margins come from the rising cost of goods without a corresponding increase in sales. A financial health checkup can enlighten you about supplier costs or production efficiencies.

The power of financial health checkups is early detection and frequent collaboration with financial professionals, which can help businesses navigate potential financial downturns and revitalize their business models.

Now, let’s dive into how you can check the financial viability of your organization with these essential steps.

Step 1: Assess your financial statements. Reviewing your financial statements, such as balance sheets, income statements, and cash flow statements, is the first step in financial health checkups. Ask yourself, how is your net income trending over the past year? Are there fluctuations that need analysis?

Here’s a quick guide to financial statements:

• Balance sheets: Show your assets, liabilities, and equity, illustrating your short-term financial health.
• Income statements: Help you analyze revenues, expenses, and profits over a specific period.
• Cash flow statements: Evaluate your cash inflows and outflows from operating, investing, and financing activities.

Step 2: Analyze financial ratios. Once you fully understand your financial statements, it’s time to make sense of them using various ratios to evaluate profitability, liquidity, solvency, efficiency, and valuation.

Here are crucial financial ratios to take note of:

• Gross profit margin
• Net profit margin
• Coverage ratio
• Current ratio
• Debt-to-equity ratio
• Inventory turnover
• Total asset turnover
• Return on equity (ROE)
• Return on assets (ROA)

Step 3: Conduct a profitability analysis. Consider different profit margins, from gross profit margin and operating profit margin to net profit margin, to determine how effectively you are generating profits from operations.

Step 4: Manage debts and assess equity strategies. Check your debt repayment schedules and interest obligations. Then, review your equity strategies and whether they balance your company’s capital structure. Perhaps you need to issue new equity, retain earnings, or optimize dividend policies.

Fortunately, many companies are outsourcing accountants and bookkeepers to stay on top of their financial obligations, including Synapse Accounting and Bookkeeping, for guaranteed accuracy and efficiency in their financial operations.

While you can review your financial health, professional guidance can give you a more comprehensive assessment and a fresh set of eyes to uncover issues or opportunities you might overlook.

At Synapse Accounting and Bookkeeping, our well-trained and highly competent financial professionals deliver insightful, valuable, and profitable analyses to help optimize financial health.

Our HIPAA-compliant services include:

• Bookkeeping
• Accounting
• CFO Services
• Payroll Services
• Controller Services

Hear what one of our long-term clients has said about our excellent service:

“We have been a client of Synapse for more than eight years. Money flow in our office has been regular, and there have been no delays in insurance submissions. This office is very efficient…”
– Dr. A.L.

Revitalize your financial health and gain a free A/R analysis by contacting us at (844) 384-7532 or accountingsales@synhs.com.

Sources:

Main, K. (2022, December 7). Small Business Statistics of 2022 – Forbes Advisor. Forbes.
https://www.forbes.com/advisor/business/small-business-statistics/