Reviewing your business finances regularly is essential to understanding your company’s financial health, identifying potential problems, and planning for growth. Whether you’re an experienced business owner or just starting, here’s a simple step-by-step guide to help you review your finances and stay on top of your numbers.
1. Set a Regular Review Schedule
Before diving into the details, establish a regular routine for reviewing your finances. Whether it’s monthly, quarterly, or yearly, consistency is key. A regular review ensures you’re staying on top of your business’s financial situation and can address issues before they become serious problems.
2. Organise Your Financial Statements
Gather all relevant financial documents. The three main financial statements you should focus on are:
- Profit and Loss (P&L) Statement: Shows your revenue, expenses, and profits over a specific period.
- Balance Sheet: Provides a snapshot of your business’s financial position, including assets, liabilities, and equity.
- Cash Flow Statement: Tracks the movement of cash in and out of your business, showing how well you manage your cash.
These documents will give you a full view of your company’s financial health.
3. Compare Revenue and Expenses
Start by analysing revenue and expenses. Compare this period’s revenue with previous periods to identify trends:
- Revenue growth: Are your sales increasing, decreasing, or stagnant?
- Expenses: Are there areas where your expenses have grown significantly? Consider whether these increases were necessary or if they can be reduced.
- Gross Profit Margin: This is your revenue minus the cost of goods sold (COGS). A higher margin means your business is more efficient at turning sales into profit.
4. Analyse Your Cash Flow
Cash flow is one of the most critical elements of financial health. Even a profitable business can struggle if it has poor cash flow. Review your cash flow statement and pay attention to:
- Cash inflows: Are customers paying on time? Are there other sources of cash inflow?
- Cash outflows: Are you spending too much on certain expenses? Can any payments be deferred or reduced?
- Net cash flow: Ensure that your net cash flow (the difference between cash inflows and outflows) is positive over the long term.
5. Examine Your Profitability
Profitability is crucial to business success. Look at your P&L (profit & loss) statement and:
- Net Profit Margin: This tells you how much of your revenue is left after all expenses. A healthy margin indicates your business is efficient at converting sales into profit.
- Break-even analysis: Understand how much revenue you need to cover all your expenses. This will help you set realistic sales goals.
6. Review Accounts Receivable and Payable
Keeping track of what you owe and what is owed to you is crucial for cash flow management.
- Accounts Receivable: Are customers paying you on time? Delayed payments can affect cash flow, so consider tightening credit terms if needed.
- Accounts Payable: Are you paying your suppliers and vendors on time? Late payments could damage relationships and lead to additional costs like late fees.
7. Assess Your Debt and Loans
Review any outstanding debts or loans. Check:
- Interest rates: Can you refinance to lower your interest rates?
- Payment schedules: Are your payments manageable, or do they strain your cash flow?
- Debt ratio: Compare your total debt to your assets. A high ratio could signal that your business is over leveraged.
8. Check Your Budget
Compare your actual financial performance with your budget. Are you staying within your budgeted expenses, or have you exceeded them? If so, why? Reviewing your budget regularly will help you adjust your spending and forecast more accurately.
9. Plan for Taxes
Don’t wait until the end of the year to think about taxes. Regularly set aside money for tax payments and ensure you’re up to date with any tax filings. Consider meeting with an accountant or financial advisor to discuss strategies to reduce your tax burden.
10. Use Financial Ratios for Deeper Insight
To better understand your business’s financial health, use financial ratios. Some key ratios to consider are:
- Current Ratio: Measures liquidity and your ability to pay off short-term obligations (Current Assets ÷ Current Liabilities).
- Debt-to-Equity Ratio: Indicates the proportion of debt to shareholders’ equity.
- Return on Assets (ROA): Shows how efficiently you’re using your assets to generate profits.
11. Seek Professional Help When Needed
If you’re feeling overwhelmed or uncertain about your financial review, don’t hesitate to seek professional help. An accountant or financial advisor can provide valuable insights and help you interpret the data.
12. Make Adjustments and Set Goals
Based on your review, make the necessary adjustments to improve your financial health. Set clear, actionable goals for the next quarter or year, such as reducing unnecessary expenses, increasing revenue, or improving cash flow.
Regularly reviewing your business finances is a crucial practice for long-term success. By understanding where your money is coming from and going, you’ll be able to make informed decisions, avoid financial pitfalls, and set your business up for sustained growth.
Looking for advice on your business finances? Get in touch with The Online Business Association and see how we can help you streamline your strategies.