Evaluating a Company's Financial Position

Bank balances don't provide enough information to gauge a company's financial health. Use financial statements and other data for a full check-up.

The recent recession has made checking in on the basics of your company's financial position more than just a to-do item. It is an absolute necessity. Understanding a company's financial health takes more than just logging in to your online bank account and checking balances.

You don't necessarily have to fully immerse yourself in those financial statements to take your company's financial temperature. Look at a combination of both financial and operational metrics that benchmark your company's current financial performance against your competition and the company's own past results.

Tips to Help Stay on the Right Financial Path

Scrutinize your cash position: A financially well-run business will have an improved cash position at the end of each and every month. Also, a healthy company generates a positive cash flow, meaning the money coming in exceeds the funds flowing out the door. Keeping a running tally of your cash position over the past three months is a great way to see if the business is generating cash over a sustained period of time.

Looking at three-month trend will help identify red flags. If sales have increased 20 percent, but your cash position is rapidly declining, there is likely an issue with accounts receivable. Could there be a cash flow timing problem?

Check Your Solvency: One way to check the financial health of your business is to use this calculation:

Cash in Bank/Monthly expenses = number of month until Bankruptcy

This ratio shows how many months a business can survive if sales suddenly stopped and customers did not pay their bills that month. Whether this happens or not depends on how quickly the cash is collected from customers and deposited in the bank relative to when you have to pay the bills for the increased expenses associated with the new revenue. If the business has to increase expenses today, but collects that additional 1 million six months from now, they can very easily go bankrupt before they collect their money, In cash management timing is everything.

Keep an Eye on Overhead Costs: While most business owners focus on growing revenues, they also need to keep an eye on how much overhead spending is happening (rent, salaries, etc.) to support those sales.

A quick way to do this is to calculate the percentage of revenues used to pay overhead:

Overhead expense percentage = Overhead expenses/sales

The number itself is not very useful but what makes it powerful is when it is tracked over a 12-24 month timeframe. Any fluctuation can reveal potential problems.

Think Strategically: While monitoring the daily dashboard is great for tactical adjustments there are also monthly or quarterly metrics that can highlight more strategic changes.

* Percentage of revenue from new products/services

* Revenue mix by product

* Revenue mix by customer

The best way to keep on top of the financial picture and to ensure that you sound the alarm before big trouble has arrived is to use a mix of current and long range metrics taken both from the financials as well as the operational side of the business.