Do you know the financial health of your business? You may be selling plenty of goods and services and feeling very positive. But what do the numbers actually reveal?
When you’re wrapped up in the day-to-day side of your business, it’s easy to miss warning signs. You might well have enough to pay staff and your bills for now. But there might be signs you’re missing that indicate a possible problem in the future.
Some business owners are so busy, they forget to send an invoice here and there. And that all adds up to a finances that are not as healthy as it seems.
You’re not alone if this describes any aspect of your business. A study carried out in the last few months reveals that 82% of those who run small and medium businesses in the UK are facing cash flow problems.
It also shows that one in three UK SMEs don’t understand cash flow!
So, how do you know the true picture about the financial health of your business?
Understand the financial health of your business
Cash flow is one way to quickly understand the real financial health of your business. But it’s not the only way. Here, we offer our top tips to help you measure how your company is doing financially.
Cash flow analysis
Understanding what cash is flowing in and out of your business reveals a lot. It is the total (or net) amount of money that is transferred in and out of your business. We’ve looked at cash flow before in an earlier blog. It might seem an obvious measure. But, as we’ve seen, many business owners overlook it.
If you’re missing invoices or not being paid on time, then it has a big impact. Late payments are a massive problem. Figures released in February 2026 show £11 billion a year is contributing to 38 business closures a day! Had they been on time, there’s a chance some could have been saved.
Analysing your cash flow is important as a gauge of your business’s financial health. And here’s how to do that.
- Focus on a set period. You might want to look at a month, a quarter or a year.
- What are you income sources? This seems simple. And it is. But don’t just look at the revenue from selling your services and products! Also check out your gains on investments. This will reveal your ‘gross income’, which is the total amount your company earns in a specific period before deductions.
- How high are your expenses? Whether it’s taxes, debt payments, accounts payable or other liabilities, you shouldn’t just keep paying them without reviewing what you’re spending. There could be expenses that are no longer necessary, such as subscriptions for services you no longer need.
- Prepare a cash flow statement. With all the data collated, you will be able to prepare a cash flow statement. If the number is positive, your business has positive cash flow. If it’s not, then your company’s in debt.
- What does it reveal? Once you see the statement and it shows the true financial health of your business, you can take action. Do you need more cash inflows? Are your outflows too high? Once you know, you can do something about it. If you don’t, you won’t know where to begin!
Carry out a financial ratio analysis
This might sound difficult, but financial ratios are important. They reveal more than your net income and gross revenue. Here are some ratios that can help you:
- Cash flow to debt. This ratio reveals how much of your current cash flow is paying debts. You calculate this by adding your net income and depreciation and then divide this figure by your total debt. If the number is less than one, it can mean your business is struggling to pay all its expenses.
- Net profit margin. To work this out, start with your gross income. Remember, that’s the income before taxes and expenses. You simply subtract your total expenses from your total revenue, then divide that number by your total revenue. The higher your net profit the better your business’s financial health.
- Gross profit margin: This figure demonstrates how much money you have left after paying for the products your business sells. You take the amount of money your business makes from its sales and subtract the cost of your goods. Divide that number by your total sales. If your gross margin is lower, it can mean you’re not covering your business expenses.
Check your business’s liquidity
Liquidity is important for your business. What it means is you have enough assets to cover your liabilities, such as costs and taxes. If your company isn’t liquid, you’re facing problems. So, knowing your business’s liquidity is a key indicator of its financial health.
Accounting software firm Xero says focusing on your assets is important as they can be sold to create cash income if needed.
To calculate your liquidity ratio divide your liquid assets by your company’s current liabilities. The final figure should show you have more liquid assets than debts! If not, then it’s time to take action.
What else can I do?
You can also look at your debts and reassess your financial goals.
If your business’s monthly debt is affecting your cash flow, it might be time to restructure your debt. Consolidating it can mean you lower your monthly outgoings. That might mean you’re paying off your debt longer, but it frees up more cash on a monthly basis. Consolidating can often lead to lower interest rates, which will also improve your cash flow.
You may also need to reassess your company’s financial goals. For example:
- Can you operate in a leaner way?
- Are their ways to invest in raising awareness of your company to increase your customer base?
- Have you spent too much on trying to access a market that’s not fruitful?
These are just some of the measures you can consider that helps make the most of your finances.
How we can help
We are not just accountants, we are genuinely interested in your business. By helping you get a picture of the financial health of your business, we can help you find ways of improving it. It’s wise to invest in taking time to get the true picture. Why not contact us today for an initial chat?
