Crunching the Numbers: Small Business Financial Checkup

February 2, 2024

As a small business owner, January offers a unique opportunity to assess your financial health. With half of the tax year behind us, it’s time to take stock of your business finances and set a course for sustainable growth.

Here’s a breakdown of how to perform an assessment of your small business finances. 

1. Review Your Financial Statements

Financial statements explain the monetary result of your business activities during a defined period – typically the 12 months corresponding with the financial or tax year ending each 30th June. These statements include: 

• Income Statement – Your Income Statement, or Profit and Loss Statement, lists your sales and other sources of revenue (such as investment income), and deducts expenses like cost of goods sold, wages and administration charges, to arrive at a net income or loss for the period. 

• Balance Sheet – The Balance Sheet is a snapshot of your financial position at a given date, often at the end of the financial year. It starts by listing the assets of your business: cash in bank accounts, accounts receivable, trading stock, investments, and fixed assets such as owned business premises and equipment. Your liabilities – including accounts payable, bank loans and other borrowings – form the second part of your balance sheet. Finally, it calculates your shareholders’ equity, which is the total value of shares you’ve issued plus the money your business has earned and kept. Essentially, it ensures that everything your business owns equals everything it owes, including what it owes to its owners. 
• Cash Flow Statement – Your Cash Flow Statement shows where and how cash is being generated and spent in your business operations. A business can have a positive Income Statement but struggle because of negative cash flow, so it’s worth knowing how to understand your cash flow and take steps to rectify any problems.

2. Analyse Key Financial Ratios

Financial ratios are valuable tools for assessing your business’s financial health. Some important ratios to consider include: 

• Profit Margin: Calculate your gross and net profit margins to evaluate your profitability. 
• Current Ratio: This ratio compares your current assets to your current liabilities and assesses your ability to meet short-term obligations. 
• Debt-to-Equity Ratio: This ratio measures the proportion of debt financing in relation to equity, indicating your company’s financial leverage. 
• Quick Ratio (Acid-Test Ratio): This ratio excludes inventory from current assets to assess your ability to meet short-term obligations without selling inventory. 
• Return on Investment (ROI): Calculate the ROI to understand the returns generated from your investments. 

Comparing these ratios over time or benchmarking them against industry averages can provide valuable insights into your business’s financial stability. 

3. Assess Accounts Receivable and Accounts Payable

Review your accounts receivable to ensure customers are paying their invoices promptly. A high level of overdue payments can negatively impact your cash flow.

On the flip side, assess your accounts payable to manage your vendor relationships and avoid late payment penalties. A well-managed accounts payable process can also help you negotiate better terms with suppliers. 

4. Track Inventory Management

If your business involves inventory, efficient inventory management is crucial. Excessive or obsolete inventory ties up your capital, while inadequate inventory can lead to stockouts. Monitor your inventory turnover rate and strive to strike a balance that optimises cash flow and meets customer demand. 

5. Set Financial Goals and Identify Opportunities

Having financial goals is a vital part of business success. Short-term goals could include exceeding the revenue of the equivalent month last year or launching a new product or service. Long-term goals might be planning for steady and sustainable growth year-on-year, achieving a stable cash flow or building a strong financial reserve. Use the SMART goal system to set your objectives.

Look for new opportunities to help achieve your goals, such as analysis of your market and competitors, collaboration with other businesses and product diversification.

Your Broker May Be Able to Help You Achieve Your Financial Goals

Reach out to your broker for support in achieving your financial goals. They may have the tools and expertise to guide your business towards growth and stability. 

This information is for general information purposes only. The information contained herein does not constitute financial or professional advice or a recommendation. It has not been prepared with reference to your financial circumstances or business and should not be relied on as such. You should seek your own independent financial, legal and taxation advice as to whether or not this information is appropriate for you.