Give Your Business a Financial Wellness Checkup

If the pandemic has taught us anything, it’s that the financial health of a business is critical to its survival. Business owners know they will always experience peaks and valleys in growing their businesses. Whether you recently started your business or are celebrating 15 years of operations, your financial health will determine how far you can go. If you want to take your business to the next level, working on financial wellness needs to be a top priority.

Here are the critical areas of concern to consider in your financial wellness checkup:

Check Your Liabilities

Carrying too much debt is harmful to your business’s financial health. If you have debt, create a cash flow plan to pay it down. If you think you will need to access financing in the future, establish a line of credit with your bank. If that’s not possible right now, consider asset-based financing or invoice factoring to avoid interest-bearing debt.

Build a Reserve Fund

No growing business is immune to temporary cash crunches. Having access to capital to cover seasonal shifts or even growth spurts should be a top priority. If you have an established business with good credit, a line of credit with your bank can be your best option. If your business doesn’t have a credit history or wants to avoid taking on debt, it would be essential to allocate any cash surpluses to a reserve fund until you have enough to cover six months of overhead expenses.

Build Your Business Credit

The need to access financing is unavoidable for most growing businesses. While lenders will consider your personal credit standing to establish credit, they also want to see how well your business manages credit. Seek out ways to start building your business credit by establishing trade credit accounts with vendors or suppliers who will report your payment history to the credit bureaus. When you can, obtain a business credit card from your bank.

Keep Your Personal and Business Finances Separate

To build business credit, you will need to keep your business records separate from your personal records. That will not only simplify your tax preparation; it will also help you avoid the ire of the IRS. Start with a separate checking and savings account for your business. You may also want to consider organizing your business as a separate entity, such as a Limited Liability Company (LLC) or S-Corporation.

Checking the financial wellness of your business needs to include a regular examination of its vitals. That not only helps ensure your business is on track, but also helps avoid any surprises.

• Cash Flow: Check on the timing of your payables and receivables to increase control of cash going in and out of the business. As you project your cash flow, know your cash flow trends for the year. Ensure you have access to cash flow, such as a reserve fund or line of credit, to cover shortfalls.
  
• Balance Sheet: Keep a handle on year-over-year changes to your balance sheet, including assets, liabilities and inventory. Are they trending favorably? Always look for ways to improve your balance sheet.
  
• Expenses: Track your expenses from month to month and year over year. Establish expense control procedures.
  
• Sales: Examine your revenue sources and any trends or shifts in their composition. An important gauge of the business’s financial health is the cost of sales and whether it’s going up or down.
  
• Business Plan: Review your strategic initiatives for performance and effectiveness. Are the initiatives being executed? What’s working and what’s not working, and why? Make any necessary adjustments to their execution.
  
• Operations Management: Review all functions and processes. Are resources and staff being used optimally? Can efficiencies be improved by outsourcing certain functions?

Dealing with the trials and tribulations of building a business comes with the territory for business owners. However, many can be avoided, or at least not repeated. The challenge for many business owners is that they tend to spend more of their time working in their business rather than working on their business.

When you become mired in the details of running the business, it isn’t easy to see the forest for the trees. You become more reactive than proactive, which could be the difference between success and failure. It’s your responsibility to give your business a regular financial wellness checkup and then allocate the proper resources to keep it functioning while keeping your eyes on the big picture.