The financial health of a business corporation refers to the financial state of a business which illustrates the well-being of its operations. Financial health itself is known to be an indicator of substantial importance in an establishment which determines the profits margins of a company. Profit margins of a company depict the phenomenon where profits exceed the cost in a revenue generated by a business. However, financial health of a business is necessary for running a smooth and successful business which ensures its welfare both in terms of market status as well as higher returns at minimum costs. A recent study conducted in order to explore the key factors which tend to promote prosperous businesses stated that the business enterprises with a high rate of profit margins possess three common attributes. They are:
- They are insured for future concerns such as immediate emergencies.
- They tend to appoint accounting experts for advice on financial leasing of all tools and machinery used in the office.
- They manage their transaction activities through a separate bank account and are efficient in budgeting.
The following tips are for entrepreneurs and management teams which can be implemented in order to achieve sound financial health of their businesses.
Budgeting refers to the art of allocating all funds and resources available in an office in order to generate higher profits. Budgeting is a key factor to financial health as it aids in the appropriate use of resources in order to conduct the operations of an office. This tends to provide a business certain limitations and requirements which are necessary in order to proceed with the working processes in an office. Several bookkeeping softwares are available to support the budgeting activities in a financial world. Bookkeeping is the concept of keeping all transactions records in order to avoid any misunderstandings and corruption. This maintains a healthy financial balance in a company. Several bookkeeping softwares such as QuickBooks are available in order to accurately measure and record the transactions taken place in a business which, in return, provides key suggestions for budgeting in future endeavors.
In order to determine an enterprise’s capacity to fulfill its short-term liabilities, quick ratio is used to determine the economic well-being of a company. A simple formula calculates the ratio of assets to a company’s liabilities. The formula states:
Quick Ratio = Current Asset and Inventories/Current Liabilities
The formula above illustrates the way to discover the quick ratio of a company to determine the cash flow which can be beneficial for repaying debts on time. This also ensures the economic and financial well-being of a company through depicting the marginal profits generated by it.
Current ratio refers to the value in monetary terms which depicts the company’s financial stability in respect to its abilities to pay short-term and long-term debt or liabilities. The formula of current ratio is written as:
Current Ratio = Current Assets /Current Liabilities
This gives a quick view regarding the comparison of assets with that of liabilities. If the assets are more than the liabilities, a company is financially stable enough to repay short-term and long-term debts.
The financial health of a company is the indicator for its marginal profits. Marginal profits ensure the economic and financial well-being of a company where it can easily go for future investments as well as repaying debt.
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