When running a business, regardless of its size, it’s essential to keep your income statement and balance sheet ready to determine the financial health of your company. As a business owner, you must have information about your company’s financial status, which is why it’s suggested to run a financial health check periodically. If you find it difficult to prepare financial statements and then analyse financial data because of a busy schedule, you can get help from a small business bookkeeper.
What is the meaning of the financial health of a company?
Everyone talks about the financial health of a company, but what exactly is it? Well, financial health reveals how well a company is doing, how much profit it is making and how much it has lost.
How to determine the financial status of a company?
Determining the financial status of a company helps you know if your business is making sufficient profit. When determining or analysing the financial condition of a company, it’s essential to analyse several documents and compare various financial ratios. In simple words, you cannot solely consider your bank statement to check if your company is doing well.
To assess a company’s financial health, you must consider its income statement and balance sheet, analyse your company’s cash flow, and pay attention to common financial ratios related to equity and debt.
Check your balance sheet
A balance sheet is a crucial bookkeeping document. This report helps in determining the financial liquidity of your business at any specific time. It also helps you know about the state of your working capital and whether or not you have sufficient cash to perform day-to-day operations. Your business’s balance sheet includes assets on one side and debts and stakeholder equity on the other side. You need to use the formula: Assets = Liabilities + Equity. If your business is doing well, your assets will be positive. A balance sheet with mistakes may be a red flag about your company’s financial condition. If you don’t know how to check and read a balance sheet, it would be better to ask a Melbourne bookkeeper for your company located in Melbourne.
Analysis of the income statement
An income statement shifts its focus to your business expenses and earnings during a specific time period. This report shows whether you have experienced a loss or profit during the specific time covered in the document. This report is also known as a profit and loss statement.
Analyse your cash flow statement
A cash flow statement reveals the flow of cash in and out of a company. It doesn’t consider revenue like your profit and loss statement, but rather answers where your money is going. To identify seasonal trends, you can use a cash flow statement. Comparing cash flow statements can help you address when to purchase materials and when to market your products. Here are the main components of a cash flow statement:
- Opening balance: It indicates how much cash and cash equivalents you have at the beginning of the analysed time period.
- Cash incoming: It shows how much money you earned from grants, sales, tax concessions, or other sources.
- Cash outgoing: As the name implies, it indicates what you spent on rents, purchases, payroll, marketing, and other expenses.
- Closing balance: It is calculated by subtracting the cash outgoing from the cash incoming.
Can regular bookkeeping save businesses?
Regular bookkeeping is not just about meeting tax obligation requirements, it’s crucial for the stable financial condition of a company.
- Bookkeeping allows you to have control over your finances, ensuring you don’t run out of cash.
- Bookkeepers can help you identify areas where you can invest and where you can cut off extra expenses.
- Regular bookkeeping helps you make informed business decisions.
- Proper bookkeeping can help a tax return accountant to use financial information to prepare and lodge a tax return on your behalf.
Conclusion
Regularly assessing your company’s financial health is crucial for making informed decisions and ensuring the long-term success of your business. By consistently reviewing key financial documents like the balance sheet, income statement, and cash flow statement, you can gain a clear understanding of your business’s performance, liquidity, and profitability. Maintaining solid financial oversight is a vital part of running a successful business, and this can be achieved with reliable bookkeeping services.