Looking at your bank statement will only provide you with a limited amount of information. Additional data will be required to enable an accurate picture to be created. Checking the financial standing of your business is far more than just a quick glance of a bank statement or just another ‘to do item’. It s unfortunate but the most some business owners do is to log on online to check balances. It is a scary way to run a business. In truth it is much easier approach than digging up balance sheets. In reality bank statements cannot provide the same depth of information as a balance sheet.
Even if you have an accountant you will need to keep your eye on finances. Looking at a combination of both financial and operational data will enable you to benchmark the current financial performance of your business against your previous results.
Assessing your cash position
A financially well-run business will have an improving cash position at the end of every month. A healthy business will generate a positive cash flow. That is the money coming into your business will exceed the funds that are leaving the business. Maintaining a tally of your cash position retrospectively on a quarterly basis is a good way to assess if your business is generating cash over a sustained period of time. It is virtually impossible to go out of business if you bank account balance keeps growing each month.
It is best to look at a three-month trend because it will help you identify red flags. For example, if sales have increased, but your cash position is rapidly declining, then it likely that there is a problem with your accounts receivable. This can be incredibly risky for a business as it severely restricts cash flow.
Checking your solvency
One easy way to check the financial health of your business is to calculate the following:
- Cash in Bank ÷ by Monthly Expenses = Number of Months Until Bankruptcy
This ratio will show you how many months your business could survive if there were a decline in sales or none of your clients paid their bills that month. This ratio can be a wake up call for businesses who pay little attention to cash flow management. The life blood of a business is normally cash flow and this depends on money being collected and deposited in the bank. It is not uncommon for businesses to go into bankruptcy because of the continual late collection of revenue.
What to do?
First and foremost your business should have a clear set of management accounts which details your income and expenditure. You management accounts should contain all the financial data that is required to assess the financial health of the business. As the old saying goes ‘information is power’. No matter how hard you try there is no getting away from it. You will constantly need to keep your eyes on the financial side of the business.