Signs of Poor Business Finance Management
As a business owner, your company’s financial health is going to be of the utmost importance to you. When business finances are not being managed well, it can be difficult to understand what the problem is until it’s too late. This list is here to help business owners and managers identify problems so that they are better able to improve finance management.
Measure Your Current Capital
If you are worried about the financial health of your business, the quickest and easiest way to safeguard your company is to consult with a financial expert. A financial affairs manager will help you to identify where resources are being drained and offer solutions. If you are not immediately worried about the health of your business but want to identify how successfully finances are being managed, there are tools out there which can help.
One of the quickest ways of determining the financial health of your business is to check the company’s current solvency. To check your current capital, you will need to divide the amount of money you have in the bank with your total monthly expenses. A small number is a clear sign of poor finance management. Ideally, you will want a number that is large enough to sustain you for a sale cycle in case you run into any unexpected issues.
Check Accounts Receivable
Another way to identify poor financial management is to conduct an audit of your receivable accounts. If you notice that there are often many clients who pay you late, then this might be the cause of your cash flow problems. Get in contact with these customers and if the severity of the issue warrants it, start charging interest on perpetually late payments.
Understand Your Debt Levels
When it comes to understanding your business’s debt levels, two different calculations can be made: the Debt-To-Equity ratio and the Debt-To-Asset ratio.
- Debt-To-Equity Ratio
Calculated by dividing the company’s total liabilities by its shareholders’ equity, this equation is used to evaluate a company’s financial leverage to determine the degree to which a business is financing operations through debts or owned funds. To find your ratio divide the amount of debt you have by your equity.
- Debt-To-Asset Ratio
This is a leverage ratio that is used to determine the amount of debt, relative to assets that a company owns. The calculation shows the degree to which a company has used debts, such as loans and payable bonds, to finance its assets. Findings will help you to understand how financially stable your business is. Divide the debt you owe with the amount of assets you own to find your debt-to-asset ratio.
Know Your Net Profit Margin
As a business owner, you must know your key performance indicators, especially your net profit margin. Your net profit margin measures your bottom line and is a very good indication as to the overall health of your business. To calculate your net profit, you take your total revenue and minus the amount of your total costs. The next step is to divide your net profit by your total revenue. The figure you will have after completing these calculations is your net profit margin.