As Elon musk said, “Creating a company is almost like having a child.” While a growing child requires a healthy balance of nourishment and exercise, a budding business needs a strong financial framework, aspirations, and goals.
Similar to how your health influences your well-being, a company’s financial health defines its stability and growth potential. Are you happy with the financial health of your company? Do you think you can improve your company’s financial position? In this article, we’ll go over a few essential tips for improving the financial health of your business.
The ability to maintain the financial health of your company is as important as obtaining finances. When running a small business, your company’s business plan plays a crucial role. It will assist you in understanding your financial plan and your business’s strengths, weaknesses, and objectives. A strong financial plan will help you stay on target even when your business expands when you face obstacles, or during an economic crisis. Showing how deeply you support and comprehend your business can help its financial health, particularly when it comes to brand awareness or when you’re seeking investment.
A company’s financial health is significant because it provides several benefits, such as improved cash flow, a competitive edge, consistent production, a higher credit score, higher capital return, and greater profits. Additionally, it keeps your company floating even during an economic crisis. Maintaining a positive working capital within the company is the fundamental goal for improving financial health.
5 Steps to Improve Financial Performance of a Company:
1. Tracking and Measuring Performance Using Key Performance Indicators
KPIs help in tracking, evaluating, and analyzing a company’s financial performance. Without measuring KPIs, you cannot determine where your company is heading and whether your objectives are met. KPIs help keep track of a company’s financial health by measuring progress toward short and long-term goals, altering business operations to reach sales targets, identifying problem areas and resolving them, and spotting trends in financial data to identify the low and high seasons of a company’s financial performance.
You can measure and enhance your company’s financial health by calculating the following KPIs:
- Gross-Profit Margin
- Net Profit Margin
- Working Capital or Operating Liquidity
- Leverage Ratio
- Debt to Equity Ratio
- Cash Conversion Cycle
- Return on Investment (ROI)
- Return on Equity (ROE)
- Return on Assets (ROA)
- Current Ratio
- Quick Ratio
- Inventory Turnover
- Operating Cash Flow
- Accounts Payable Turnover
- Accounts Receivable Turnover
- Day Sales Outstanding
2. Inventory Management
A company’s financial health improves as a result of better inventory control, which can identify customer demands and preferences and produce fast-moving commodities. Slow-moving stock results in risks, and expenditures, and hurts the business’ working capital. Tracking and auditing your inventory levels will help you control your inventory better by prioritizing and organizing your supply according to the product’s market demand.
Here are a few things that companies can use to improve inventory management:
a). Inventory Reporting
Inventory errors will impact your business income statement and balance sheet. They can happen when incorrect closing inventory or inaccurate cost of goods sold is reported. These can affect the final net income balance, thereby impacting your financial status. By automating your inventory management, you can scale back on stockroom visits to track your inventory and stop filling spreadsheets manually, reducing errors.
b). Inventory Forecasting
Inventory forecasting is the process of predicting how much inventory you’ll sell over a specific duration in order to maintain the least amount of stock possible. The profitability of any company that sells and transports products depends heavily on the precision of its inventory forecasts. By doing so, you can keep up with the market while saving money on administration, warehousing, and dead stock costs.
These are a few factors that must be taken into account while forecasting inventory to ensure accuracy:
- Current industry trends
- Low and high season cycle
- Average product life cycles
- New methods to make the company’s products more efficient and cost-effective
- Competitor efficiency in managing inventory
c). Product Overstocking or Understocking
While having too many products on hand may boost the overall valuation of your company, customers will demand the latest and most innovative models, and they may want to shop from a competitor brand that sells these products. Understocking inventory can result in poor customer experiences and low working capital. To effectively manage your inventory and improve your financial situation, you must understand customer demands and analyze industry forecasts.
3. Collecting Outstanding Payments and Debts
It is critical to recover overdue payments and debts to have consistent working capital for your business. When businesses are not promptly paid, it can:
- influence small businesses ability to cover operational costs.
- limit you from manufacturing new products.
- prevent you from paying other vendors.
- stop you from fulfilling customer demands.
Poor payment methods, whether from a vendor or a customer, can often result in a business declaring bankruptcy. It can be challenging for small businesses to maintain a competitive edge without a solid working capital fund or invoice funding.
Make sure to consistently follow up with customers and vendors over outstanding invoices. Include a deadline and payment delay repercussions in your sales agreement so that you can initiate legal proceedings against uncooperative providers. Additionally, you can employ third-party debt recovery agencies to deal with such difficulties.
4. Streamlining Payroll and HR Systems
According to Paycor, payroll can take up to 70% of overall business expenses for a mid-size company. Businesses can profit from streamlining and investing in automated payroll and HR systems by minimizing manual errors, saving time, improving employee data protection, and staying updated on tax payments.
5. Short-term Working Capital Financing
Short-term business financing keeps a company afloat by bridging payment deficits and meeting working capital needs. Even though traditional and commercial banking services offer working capital financing, it is necessary to understand that they have strict collateral requirements that most small and medium-sized businesses cannot fulfill. Due to their poor or non-existent credit histories, some financial institutions’ strict credit standards disqualify small businesses from obtaining funding.
You can obtain sufficient capital from alternative lenders, who offer a range of short-term business financing options. These short-term fundings can help purchase inventory, consolidate debts, expand your business, strengthen your credit, or simply maintain a steady cash flow. Such short-term financing solutions can help a company increase its revenue and future growth, enhance operational efficiency, and generate more income.
Managing a business can be challenging. However, establishing objectives can help you have a smoother ride. With the pandemic and economic crisis, small businesses face severe instability with weak margins, poor cash reserves, and uncertain cash flow. It has become more crucial today than ever to examine and improve your business’s financial health.
With the best resources and tools, a strong business plan, the expertise to operate your company smoothly, and excellent financial health, your business can be more profitable and successful.