Business Broker Consultation
Business Broker Consultation | The financial health of a business can be analyzed in several ways. There are short-term measures such as doing good to pay monthly expenses. Then, there are long-term financial performance indicators such as the liquidity and profitability of a business.
Evaluating a business across multiple financial performance parameters offers the full picture.
How to Determine the Financial Health of Your Business?
The best way to analyze the financial health of a business is to evaluate its long-term performance with a Business Broker Consultation.
Let us discuss a few key financial performance indicators to determine the financial health of a business.
Check Your Revenue Trends
Your revenue stream runs the business. When analyzing the income statement, you should establish the revenue trend across several accounting periods.
Cyclic businesses witness uneven revenue streams. Thus, it’s important to evaluate revenue trends in the long run with a Business Broker Consultation.
Compare the quarterly income statement revenue figures for yearly analysis. Similarly, compare revenue figures for several years. Even if the revenues do not show a great sudden spike, they must show a positive trend.
Growing revenues are important for the financial health of any business. When businesses expand, their revenue streams must match an upwards trend as well.
Evaluate if Your Cash Flows are Positive
Cash flow is closely linked with the revenue stream of a business. If you earn sufficient revenue, your cash flow should be sufficient as well. However, several factors such as working capital management affect the cash flow of a business.
It is important to manage cash flows. A healthy business will keep positive cash flows. Low cash flows mean your business will not be sustainable. You’ll depend on external debt financing.
Keeping an optimized cash balance is important. If you retain too much cash, you’ll build assets with liquidity issues. Contrarily, if you withdraw too much cash out of business, you may rely on debt financing often. This is a key topic to discuss during a Business Broker Consultation.
Profitability – The Bottom Line of a Business
Many businesses do not achieve profitability in the short term. However, profitability is the bottom line for any business. Evaluate your business profitability in the long term.
Analysts use different profitability measures. Profit margins are widely used financial performance metrics. For instance, evaluating gross profit and net profit margins can reveal valuable information about the financial health of your business.
The profitability measures will also depend on the pricing strategy, operating efficiency, and revenue streams of your business.
Like any other financial performance ratio, it’s important to analyze the trends for profitability. If the profitability ratios show an upwards (positive) trend, it means your business is growing.
How is Your Debt Ratio Doing?
Many businesses struggle due to excessive debt financing. For this reason, a Business Broker Consultation is necessary. It increases the cost of financing and eventually puts a business under pressure. Many businesses default due to excessive debt financing.
High leverage levels increase interest costs as well. Therefore, it is important to keep a check on the debt ratios.
Debt can be compared against equity and assets. Both of these debt ratios are important indicators of the financial health of your business.
An important to mention here is that some industries witness higher leverage levels traditionally. For instance, real estate businesses have high gearing levels often above 100% too.
If your operating expenses increase in line with the increased revenues, it is understandable. However, if you cannot keep a check on your operating expenses, your business will face several issues.
One of the key reasons for struggling businesses is their lower operating efficiency. An efficient business means your business is utilizing operating resources perfectly.
In terms of financial ratios, evaluating operating profit margin is the key indicator here. It indicates the operational capacity of the business. Importantly, it also indicates a management’s ability to control operating costs.
Evaluate Your Customer Base with a Business Broker Consultation
Repeat customers are important for every business. The acquisition of new customers is costly for several businesses. Thus, it is important to retain the existing customers by offering them the right products/services at the right prices.
However, it doesn’t mean you shouldn’t focus on gaining new customers. A growing customer base is also an important indicator of the financial health of a business.