It’s no secret that almost every industry is constantly struggling with money. We all want to make more money, but the reality is that it takes some hard work and dedication to do so. As a business owner, you need to know how your organization is doing financially. An organization’s financial health needs to be monitored and analyzed regularly to keep things afloat.
Staying updated on your organization’s financial health is essential to determine if you are making more money than before. It is also a good idea to see if you are spending less money in specific areas. If there is a decline, it might be time to change or introduce new ideas to remain financially stable and prosperous. In this blog post, we will discuss how to determine the financial health of an organization, so you know exactly where you stand financially.
What is Meant by a Company’s Financial Health?
A company’s financial health is how much money it makes and how well its expenses are managed. A direct relationship between the two needs to be monitored for an organization’s financial health to remain strong. Sometimes there may be a variation in either direction, but keeping both numbers intact helps you decide what changes are required, so your company continues growing.
A business owner must see exactly how much money his/her company has made and what types of expenses the organization has paid. These two numbers help determine areas where changes need to be implemented for an organization’s financial health to remain strong.
How to Analyze Your Organization’s Financial Health
If you are thinking of how to increase the buying power of your customers, then you need to analyze how your organization is doing financially. There are several aspects of your company you will want to consider when determining your organization’s financial health. When you begin analyzing the financial health of your organization, there are a few different things you should consider.
Calculate Net Income
This number is the total amount of money your company has made after all expenses have been paid. This number is vital in determining if things are moving in the direction you want them to be going financially. When this figure increases, it means your organization’s financial health is improving along with revenues and assets. Net income is measured by subtracting expenses from revenues.
Calculate Operating Income
Operating income is the amount of money your organization has made before interest and taxes are paid. This number will help you determine if there is any growth within certain departments or specific areas that may need some attention to keep growing financially. When this figure increases, it means an organization’s financial health is improving and its cash flow.
Calculate Cash Flow from Operations
This number tells you how much money your organization has made from the ordinary course of doing business. It includes all revenues and expenses for the year. To determine that if your organization is in a satisfactory financial state, this number needs to be positive or at least equal to zero. If this number is negative, there may be a problem your organization needs to address immediately for financial health to remain strong.
Calculate Cash Flow from Investing Activities
Cash flow from investing activities calculates how much money your company has made or lost in capital expenditures and investments it holds, such as bonds, stocks, or other assets that are not part of the ordinary course of doing business. A positive number means an organization’s financial health improves, while a negative number may mean some changes need to be made.
Prepare a Balance Sheet
A balance sheet is a snapshot of your company’s financial health at any given time. It shows what the organization owns and owes, as well as its capital or net worth. During this preparation process, you can see how much money has been made over time to determine if an organization’s growth is increasing based on its assets and net worth.
Measure The Liquidity
Liquidity is measured by seeing how much money your company’s current assets can cover current liabilities. This number will help your organization remain financially healthy by ensuring all obligations are paid on time for both products sold and services rendered.
It is determined by measuring the current ratio and quick ratio. The current ratio is calculated by dividing the existing assets, including cash, inventory, and accounts receivable, by total current liabilities. The quick ratio is measured by dividing the quick assets by current liabilities. Both ratios are used to determine how easily an organization will pay its short-term financial commitments.
Analyze the Credit Score
While determining if your organization is financially healthy, it is essential to look at its credit score. This number tells you how much debt an organization has and if it pays its bills on time. Your credit score can also help you determine if any issue needs your attention regarding your organization’s financial health. It is vital to keep your credit score high so you can continue borrowing funds if required without having too much debt.
Take a Look at Solvency
Solvency is determined by taking a look at liabilities, such as accounts payable and creditors, then determining if they are more or less than an organization’s assets, which include cash, inventory, and accounts receivable. If your organization’s liabilities are more significant than what it owns in assets, there is a good chance it has financial issues.
Solvency is somewhat similar to liquidity as it also looks at how easy it is to meet financial obligations. The difference between the two is how they are calculated. Solvency is determined by how much debt an organization has, while liquidity is how easily it can pay its current financial obligations.
Pay Some Attention to Efficiency
Efficiency is how well an organization uses its assets to generate income. This ratio will determine how much profit an organization makes based on how many assets it has, how much money is spent and how well it attends to its customers. The higher this number, the better an organization manages its assets and how much money it has come in for the amount being spent.