Get 3 Financial Health Strategies for Your Small Business
By Rachel Siegman April 14, 2016 General Business, Small Business
Most small business owners don’t start with a formal finance background, but financial health is foundational for short and long term small business success. Get tips below on how you can improve your company’s financial health.
Tips to Immediately Improve the Financial Health of Your Small Business
1) Set a financial plan and track it
Set and document your business revenue targets for each year in the next 5 years. Know if you’re on track by comparing your actual finances with your target goals .
2) Set aside reserves for a rainy day
Business isn’t always predictable and most entrepreneurs go through periods of high and low cash inflows. Having cash reserves on hand can help you stay afloat during slow periods. Go through your expenses and evaluate how much money you need to get through the month. Most financial advisors recommend having up to 6 months of cash reserves to maintain your company’s financial health even in the slow periods.
3) Constantly consult your cash flow statement
92% of small businesses in the U.S. fail due to poor cash flow management according to a Dun and Bradstreet report; and the infamous bankruptcy of entertainment giant Blockbuster can prove how important cash flow is for business success. In 2010, after 25 years in business, Blockbuster declared bankruptcy due to a negative $30 million balance. The lack of cash flow was a sign of unstable financial health for stakeholders and investors, forecasting only operational hardships ahead.
For your business to avoid such events, consult your cash flow statement – constantly.
One important formula small businesses need to know is Day Sales Outstanding:
Accounts Receivables x Number of Days
Total Credit Sales
Also known as DSO, this formula can provide insight into your company’s financial health by showing how long it’s taking to collect account receivables. The goal is to keep this number low so you have cash on hand quicker to pay your vendors and run your business.
Putting time into your small business’ financial health
A study by the Federal Reserve of Chicago Pepperdine University in 2014 concluded that “small businesses that have a better understanding of asset based financing, including inventory financing and accounts receivable financing, scored higher on the financial health index.” Take out the time to pay attention to your business’ financial needs so you can make educated decisions for your business’ financial health.