The slow build-up of debt can contribute to the eventual collapse of a business, and small businesses are struggling now more than ever. Over time, your company may show signs of trouble, eventually moving into a deeper state of financial distress. And if the early signs are not actively addressed, your business can quickly snowball.
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Below, we’ll discuss how you can keep tabs on your company’s finances, which is instrumental for the immediate and future success of your startup
Cash flow test
Cash flow refers to the movement of money in a business. If there’s more money leaving the business than there is entering, this is a sign of a business at financial risk.
If your business has poor cash flow, you may begin to struggle making essential payments to suppliers, creditors and employees. And if the money coming into your business fails to stack up against outgoing spend, you’re at risk for eventually falling into debt.
Balance sheet test
A balance sheet provides a breakdown of your company’s assets and liabilities. If the value of outstanding debt outweighs the value of assets, your company may run the risk of operating while unable to pay those debts.
The following elements should be included on your balance sheet:
- Your company’s tangible assets (such as vehicles and machinery used for daily operations)
- Any physical cash held in your business
- A breakdown of short- and long-term liabilities
- A breakdown of any money owed to you, as this is important in terms of factoring in pending funds
If you find your business is asset-rich but has poor cash flow, this signals a problem for the long-term viability of your business.
If you are struggling to meet essential bills (such as rent and utility payments) on a recurring basis, this is an indicator of trouble.
If you find yourself in this position, it’s essential to enforce a plan of action early. The health of your business could quickly worsen and failing to make payments could result in legal action taken against your business. It may be time to rethink your financial strategy if you find your business is making late payments regularly.
In addition to late payments, hitting the credit limit on any of your business credit cards hinders your startup’s financial security, as you’ve exhausted any emergency funding available to you. This is very risky, since by using up all available credit, your business is left with no breathing room.
On the other hand, if you’re gliding month-to-month with enough funds to fulfill your business expenses and cover additional investment, this is a sign your business is on strong footing.
Accurate record-keeping allows you to stay within budget and ensure that your financial forecasting is on target. Inaccurate records could inflate the perceived value of your business, which could have drastic and damaging effects.
A budget can help you visually grasp the amount of money your business has. If your budget is on target, you can start streamlining your financial strategy by identifying how your business can work more efficiently.
Accumulation of bad debts and late payers
You will inevitably come across a handful of customers, suppliers and clients who are notorious for late payments. However, if this tardiness turns into non-payment, you’re facing what is called “bad debt.” Bad debt refers to the unlikely prospect of a debtor failing to repay funds owed to your business, eventually resulting in the debt to be written off.
An effective way of tackling bad debt is to set terms for non-payment, putting the possibility of legal action on the table. This will likely work as a deterrent for late payments.
If you suspect that your business is at the end of its financial lifeline, it’s essential to explore ways to keep your company afloat. Act early and identify any pressure points before they cause deeper injury to your business.
If your business is going full-steam ahead without any financial strain, it’s all the more important to put measures into place to prepare for a rainy day, ensuring that your business can support itself financially.