Financial difficulties are one of the main causes of business failure during the initial years, often due to poor forecasting and planning. Although taking risks is a crucial part of life as an entrepreneur, taking unnecessary risks can cause huge problems for a company, which is why it is important to assess the strength of your business finances.
Studying your balance sheets
The company balance sheet will provide you with an accurate synopsis of the financial health of your business. You can see at a glance the liabilities and assets of a company, detailing its income and expenditure. What’s more, your balance sheets may be used as a reporting tool when preparing the annual business accounts. A third party, such as a shareholder or investor, may also use the balance sheets to assess your enterprise’s fiscal situation.
Financial management can be improved with the help of an accurate balance sheet, as inconsistencies may produce a false outcome. To ensure accuracy, companies often outsource to a professional accounting service.
Managing cash flow
Cash flow really is the life blood of a business, which is why you must manage your finances as a priority. Create and maintain charts that demonstrate the income and expenditure of your company. This is a long-term strategy to measure the performance of your company’s finances. The figures of your sales should be compared to the expenditure, or accounts payable, for the business over a period of several months, as there will be ups and downs. Use the charts to see if a pattern emerges, with any obvious reasons for lower income levels or greater expenditure, and put measures in place to change those patterns.
Comparison of balance sheets
It is possible to compare current balance sheets against those from earlier periods to highlight strengths and potential faults in your finances. Figures from the profit and loss accounts are often used to compare performance. Comparison may highlight potential difficulties with your cash flow that need to be addressed. For instance, your levels of stock may be increasing while sales are falling.
Comparison against competitors in your field will also indicate your position in the market. Any weaknesses will be highlighted, while strong a financial performance will also be confirmed.
The financial strength of your company is crucial to your survival and needs to be a priority. Contact us for more information about financial assessment.