When we ask how to assess the financial health of a company, what we’re talking about is financial analysis. I’ve always encouraged small business owners to carve out time to up their financial IQ.
That being said, the internet is full of soft language that does not get to the point of the issue, exempli gratia “financial health.”
In this article, I’m talking to owners of profitable businesses who can generate financial statements from software and are now looking to put those statements to use.
Below are short explanations of each statement and how each statement is related to the question of how to assess the financial health of a company.
What is “financial health,” and how do you measure it?
It’s essential to understand the criteria we use to determine financial health, so we’ll take a look at each individually.
1. What to look for in a balance sheet
A balance sheet includes your total assets, which are your liabilities versus the equity you have in the business.
The balance sheet paints a broad picture of your business’s financial status and shows the valuation of your company at a fixed point in time.
With this information, you have a more informed picture of the financial state of your company.
2. What to look for in an income statement
An income statement collates all your revenue and expenses over a period of time. Your gross profit is calculated by adding up all your revenue and subtracting all the expenses related to producing a good or service.
Where should you invest your profits? Where should you look first to plan for growth? An income statement contains data that can help answer those questions.
3. What to look for in a cash flow statement
The balance sheet and an income statement are big-picture items. While knowing your gross profit and income are important, it still does not provide a complete picture of your company’s finances.
A cash flow statement gives context to both statements by showing you when money is coming in and going out and where money is coming from.
Further, a cash flow statement breaks down cash flow into three categories: operating, investing, and financing. For example, a business with cash flow that is 75% financing and 25% operations is not sustainable.
Here’s how a CPA firm can help
A CPA firm takes the financial data you already have and conducts a financial analysis of the data. From that financial analysis, you will receive actionable assessments and determinations that will help you understand your company’s present and future viability.
In turn, you can make the necessary changes and improvements to your business with confidence.
So, when we ask how to assess the financial health of a company, we’re talking about financial information as insight—what you need to know to build your business and plan for the future.