The Business Owner’s Guide to Financial Fitness

The economy is rumbling.  Concerns of inflation, recessions, and supply shortages are swirling.  With economic uncertainty looming and the start of the third quarter of 2022, it’s a perfect time to take stock of your company’s  financial footing.  By taking these steps to ensure financial fitness in your business, you can be equipped to combat outside risks that can impact your company’s performance and health.

The most important indicators of a company’s financial fitness are liquidity, solvency, operating efficiency and profitability. Together, these indicators help to paint a complete picture of the business’s viability. Additionally, by taking these proactive steps each month, you can be on your way to building a great business with a healthy future.

Implement Financial Forecasting

Think of financial forecasting as a financial blueprint that advises purchasing, R&D, hiring, capital raises, sales structure, and more to lay out the best path to achieve your goals.  Forecasting is a critical component to maximizing financial health as it utilizes intelligence from your business data, industry trends, projections, and business goals.  Implement a month-by-month forecast of target and conservative projections that act as a guide to help you climb towards financial growth. Your forecast can help protect the business during economic slowdowns, unforeseen risks as well as prepare you to invest the capital needed to scale the business, expand into new markets, or launch new services and products.

Control Inventory Management

There is a positive correlation between the quality of a company’s inventory controls and its financial performance. Many financial ratios incorporate inventory values to measure aspects of a business’ financial health.  Anything that involves your products, from timely ordering to proper receiving, tracking and storage, is part of inventory management. Overestimating or underestimating your inventory needs can impact your company’ bottom line. By minimizing lost sales, misplaced stock and excess ordering, inventory management boosts your profits.  Some strategies to manage inventory are to move old and obsolete inventory out or stocking the smallest amount of inventory you need in order to turn over the most product is the best practice to reduce your carrying costs.

Monitor Accounts Receivable.

Businesses often rely on cash flow that they haven’t yet received. That’s why your average A/R collection period is an important performance metric. It’s smart to know how to calculate your collection period, understand what it means, and how to assess the data so you can improve accounts receivable efficiency. 

Unfortunately, we all have those customers who are late to pay or even worse, don’t pay at all. The goal of effective accounts receivable management is to optimize your billing, payments, and collections process to minimize the time it takes to get paid.  If you feel that you are constantly chasing after past due invoices, look carefully at indicators such as accounts receivable turnover, credit policies, cash collection schedules and the aging of receivables to keep cash flowing and your financial health on top. Most payment issues you’ll encounter are because clients have trouble receiving, viewing or understanding your invoices, or because they don’t have access to a quick and convenient payment method.  Eliminate those issues by setting up a system that’s easy for customers to use and constantly communicate your policies and terms.

Watch Your Numbers

The best way to make sure your business stays financially fit is to live by your numbers, including revenue, expenses, payroll, overhead, balance sheet and so forth. Spend time each week reviewing spreadsheets and balance sheets, create financial models and forecast sales—and make sure you’re sticking to a budget. At the most basic level, you need three financial statements to assess your financial health: a balance sheet, cash flow statement, and profit and loss statement.

Some additional key numbers you need to watch closely include:
Net income
Sales and marketing
Product pricing
Gross margin
Total inventory

Plan for Profits

An indicator of just how profitable the business is or if something is derailing profits is analyzing your profit and loss statement.  For example, if your company is bringing in $100,000 in sales per month, but if it’s paying out $122,000 every month for overhead, payroll and other expenses needed to operate, then you’re losing money and won’t be financially viable for long.  While the other steps outlined in this article help provide a well-rounded view of a company’s financial health, profitability is often the ultimate determiner of the company’s future financial position. If your company is losing money, it’s time to act quick with some serious financial assessments. There could be multiple scenarios that could help improve profitability including price increases, reduction in overhead expenses, reduction of staff, vendor contract negotiations, and more.  Hiring a business advisor or a fractional CFO with deep experience can help assess where the money is going, how to fix leaks and get you back on course.

Executive Financial Health Strategies

Now that you are armed with some key components to improving your company’s financial health, you are ready to start strategizing. The first step in any good strategy is to begin planning. Set objectives for your business’s financials, then measure progress along the way. Take the time to set goals, such as revenue targets or acquiring new clients. Next, set long-term plans and goals–objectives that you want to reach in 12 months and even five years. Continue to think ahead and evaluate your budget and these key guideposts to stay on top of your company’s financial health.

At Norris CFO, we know that running a business is lonely. Everyone looks to you for the answers. Imagine being able to lean on a trusted business advisor who has experience helping companies of various sizes and industries overcome the same obstacles you may be facing today. Imagine having a sounding board to bounce ideas and gain wise advice from before making any important business decisions. Norris CFO Strategic Business Partners is passionate about helping CEOs and Owners build great businesses so they can live their best life.

If you should have questions, or seeking advice on strategic business matters, contact us today.

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