How do you know your company’s financial health?

How do you know your company’s financial health?

Assessing a company’s financial health is crucial to its management, who must ensure its solvency and long-term viability. Here’s a step-by-step guide to get you there.

The two steps to analyzing your business

There are two main diagnostics to be carried out to know the financial health of your company;

Carry out an economic diagnosis

It’s important to take a close look at a company’s position in its sector in order to diagnose its economic performance. In particular, we look at how the company operates, its target clientele, current regulations, the technologicalenvironment, as well as sales volume and gross margin.

Carry out a financial diagnosis

Assessing a company’s ability to cope with unforeseen events is also crucial in determining its financial health. The indicators to be assessed are :

° It’s essential for a company to keep an eye on its receivables and payables because of the time it takes customers and suppliers to pay. Cash flow is optimized when supplier debts are as low as possible.

High working capital is an indication of a company’s poor financial health; low working capital, on the other hand, is a sign of good financial health.

° A company’s net cash flow is the difference between its cash flow and its working capital requirement. A company with a positive cash flow has a surplus, and a company with a negative cash flow needs to improve either its FR or its WCR.

° A company with negative working capital is undercapitalized and at risk of insolvency; it must either raise more capital or cut spending. Positive working capital indicates that the company has more cash than it needs and can therefore invest the excess capital;

To properly assess a company’s financial health, these parameters are difficult to understand. It is therefore advisable to seek expert advice.

When to carry out diagnostics

An organization’s financial performance can be assessed by analyzing its financial statements. So it’s a good idea to do it regularly. Before any major transaction, such as an initial public offering (IPO), buyout or takeover, for example, an analysis must be carried out. Investors need to be assured of the company’s financial solidity.