The financial health of a business refers to its financial state, which illustrates the well-being of its operations. Financial health itself is known to be an indicator of substantial importance in an establishment that determines the profits margins of a company. Profit margins of a company depict the phenomenon where profits exceed the cost in revenue generated by a business. However, financial health is necessary for running a smooth and successful business, ensuring its welfare in terms of the market status and higher returns at minimum costs. A recent study conducted to explore the key factors which tend to promote prosperous businesses stated that 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 that can be implemented to achieve sound financial health for their businesses.
Efficient Budgeting
Budgeting refers to the art of allocating all funds and resources available in an office to generate higher profits. Budgeting is a key factor in financial health as it aids in the appropriate use of resources to conduct an office’s efficient and effective operations. This tends to provide a business with certain limitations and requirements which are necessary to proceed with the working processes in an office. Bookkeeping software is available to support budgeting activities in an organization. Bookkeeping is the concept of keeping all transactions records, including funds in and out, to avoid any misunderstandings and potential fraud or corruption. With the help of bookkeeping software, efficient budgeting maintains a healthy financial balance in a company. Bookkeeping software such as QuickBooks is available to accurately measure and record the transactions taken place in a business which, in return, provides key suggestions for future budgeting and reference for forecasting.
Quick Ratio
To determine an enterprise’s capacity to fulfill its short-term liabilities, a 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 or undertaking new investments. This also ensures a company’s economic and financial well-being by depicting the marginal profits generated by it.
Current Ratio
The current ratio refers to the value in monetary terms, which depicts the company’s financial stability with respect to its ability to pay short-term and long-term debt or liabilities. The formula for the current ratio is written as:
Current Ratio = Current Assets /Current Liabilities
This gives a quick view comparing 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.
Conclusion
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 pursue future investments as well as repay debt. Through efficient budgeting and finance management in a separate account, an organization can accurately use Quick and Current Ratios to assess financial health further. Once health is determined, goals can be set, including investments or savings for unexpected events and emergencies. Similarly, funds can be used to employ a third party or hire account experts to manage and monitor the company’s financial health.
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