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Are you often in doubt regarding the financial path of your company as a business proprietor in Australia?
You are not alone!
In the current fluctuating economic setting, it is very important to have a stable financial position for any firm willing to thrive long-term.
However, regular assessments of financial well-being are necessary as they help owners understand their company’s position and what requires improvement.
Thus, we have decided to give you nine key pointers on how to carry out an exhaustive evaluation of your enterprise’s finances.
1) Get Familiar With Your Financial Ratios
Having knowledge of your financial ratios is similar to having a blueprint of how your business performs financially. Such ratios shed light on aspects like profitability, liquidity as well as general stability of any given company.
Here are five key ratios to focus on:
| Ratio | What It Measures | Formula |
|---|---|---|
| Gross Profit Margin | Profitability of core business operations | (Revenue – Cost of Goods Sold) / Revenue |
| Net Profit Margin | Overall profitability after all expenses | Net Income / Revenue |
| Debt-to-Equity Ratio | Financial leverage and risk | Total Liabilities / Shareholders’ Equity |
| Return on Equity (ROE) | Efficiency in using equity to generate profits | Net Income / Shareholders’ Equity |
| Return on Assets | Efficiency in using assets to generate profits | Net Income / Total Assets |
Regularly calculate these ratios and compare them to industry benchmarks and your historical performance. This practice will help you identify trends and areas for improvement in your business.
2) Review Your Cash Flow
An essential aspect in the running of any business and particularly during the early stages is the cash flow and the same applies to the SMEs. The cash flow statement will be able to indicate as to whether the business is in a position to meet its expenses. It also informs you where you are getting cash from, for instance from sales and loans and many more, and how you are utilising it.
If you get into the practice of analysing the flow of cash, you could often detect such an issue right on the onset, where money is being spent more than earned. If this is your situation where expenses are high, then you have to consider the options of how to save costs or perhaps revise your otherwise preferable spending budget.
3) Improve Your Debt Collection Process
Late payments can severely impact your business’s financial health. To improve your debt collection:
- Set clear payment terms upfront
- Implement an efficient invoicing system
- Follow up promptly on overdue payments
- Consider offering early payment discounts
- Use debt collection software to automate follow-ups
If you’re struggling with persistent late payers, consider engaging a professional debt collection agency to recover outstanding debts.
4) Evaluate Your Sales Pipeline
Your sales pipeline offers a glimpse into your business’s future financial performance. Regularly reviewing your sales pipeline lets you understand where potential clients stand in the purchasing process. This information allows you to:
- Adjust your marketing strategies
- Set realistic sales targets
- Identify opportunities for improvement
Consider tracking new clients and repeat customers, as each group requires different customer service strategies. Cultivating relationships with your customers can improve long-term revenue generation.
5) Conduct A Strategic Review
A strategic review goes beyond the numbers and looks at your overall business plan.
Ask yourself:
- Are your financial goals still realistic and aligned with market conditions?
- Have customer needs or market trends changed?
- Are there new opportunities or threats in your industry?
- Is your current business model sustainable?
This review will help you identify areas for improvement and ensure your business remains competitive.
6) Separate Personal And Business Finances
Maintaining clear boundaries between personal and business finances is crucial for accurate financial management and legal protection. Steps to achieve this include:
- Opening separate business bank accounts
- Using dedicated business credit cards
- Paying yourself a salary rather than dipping into business funds
This separation simplifies tax reporting and provides a clearer picture of your business’s financial health.
7) Keep Track Of Your Numbers
Being financially sound entails a lot and the first step towards the same involves record-keeping. In other words, what one needs is constant surveillance of his or her expenditures, income, salary wages, and any other financial figure of importance. This helps you plan on events that are good like the gross revenue is on the rise or events that may be bad like the expense account is rising beyond what the income account is getting.
Take time often to have a glance at the return on investment. With the understanding of the ROI of some endeavours in your business, you are well placed to determine where to direct resources to.
8) Fulfill Financial Obligations Promptly
Timely payment of financial obligations is non-negotiable for maintaining good financial health.
Prioritise payments such as:
- Employee salaries and benefits
- Taxes (GST, PAYG, etc.)
- Supplier invoices
- Loan repayments
Consider automating recurring payments to ensure they’re never missed. Aim to keep your payroll costs between 15-30% of your gross revenue for optimal financial health.
9) Financial Goal Setting The SMART Way
It will be beneficial to your business if you use the SMART model of developing Specific, Measurable, Achievable, Relevant, and Time-bound financial goals.
Examples include:
- The improvement in the gross profit margin should rise to 2% for the next fiscal year.
- Cut operational costs of the business by at least 5% within the next one and half calendar years.
- To earn a revenue growth of at least 15% for three successive calendar years.
Review the goals often and use strategies that fit the progress made in the achievement of goals and the present market trends.
Take Control Of Your Financial Health With Knote
Financial health is at the heart of any business success. We know that being an owner of a business bears some very special challenges. At Knote, we provide the fastest and most flexible solution to grow your business. We realise that it might be short-term funding needed for cash flow management or for gap financing while buying properties. At Knote, AI-based assessments enable rapid decisions to offer customised funding options.
Stay ahead of the game and let Knote help your business have a secured financial future. Apply now and take that step towards financial stability today!
