Financial Measures To Future-Proof Business
August 9, 2019
Businesses are now moving past the initial shockwaves of the COVID-19 pandemic and are looking for ways to survive and thrive in this economic downturn. In order to plan for the future, businesses must have a comprehensive knowledge of where their business is currently, and where it is going.
Many business owners have reported that they find themselves spooked by all the different financial measures, as they often are not explained in plain language.
However, once a business owner understands liquidity, profitability and operating ratios, they will be able to make important business decisions quickly.
These three ratios are key indicators of your business health, where it has been, where it is now, and where it is going.
Highlight whether your business has the cash on hand to pay debts as soon as they are due. These ratios measure solvency and can be calculated through current ratios or quick ratios. Whilst this might be difficult to conceptualise, a simple spreadsheet formula can do the math for you.
If these ratios are below one (1) and declining, it is an early warning sign of liquidity issues. Identifying these issues ahead of time can prevent insolvency, which is highly important to look out for. Business owners have a statutory duty under the Corporations Act 2001 to not allow their business to trade whilst insolvent and can be personally liable.
Once identifying liquidity issues, business owners can then mitigate the issue through cashflow forecasting, reviewing expenses and pricing, and shifting their business strategy.
Work exactly as they sound, they assess the profitability of your business. Of these ratios, the most important ones to focus on are the gross profit margin and net profit margin. If a trend of these ratios declining becomes apparent, it can signal that your cashflow may start to become impacted.
Just like liquidity ratios, your business’ profitability can be calculated through a spreadsheet formula.
Can highlight how your business is utilising its assets and working capital, and if these are being used effectively. These includes ratios such as days receivable, days payable, and inventory turnover.
Operating ratios offer an insight into how efficiently the business is operating, and thus indicate if your business would benefit from some adjustments to its operations.
When planning your business’ future, it is important to look at the bigger picture within your business. These three key financial ratios, liquidity, profitability, and operating, help determine where your business is now, and where it is headed.
This information can ensure your business is adequately planning for the future.
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