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How Do You Measure The Financial Health of Your Business

Measure the Financial Health of Your Business

In the time of ‘stay home, stay safe’, one realises the true importance of health. This is true not only for us but for those around us too. Just as we need to stay healthy to keep working hard towards achieving our goals, businesses need to remain healthy too, to be able to grow bigger and better.

But how does one measure the health of a business?

Well, we’ve listed a few ways following which, it won’t be as much a task as it sounds:

1)    Liquidity

         Liquidity can be defined by the amount of cash along with assets that can be easily converted to cash, that your business has. It is also the key factor in assessing the financial health of your business. High liquidity assures the survival of a business in short term, as well as long term.

2)    Asset Turnover Ratio

         Dividing your annual sales by the price of your total assets of the corresponding year, gives you what can be called as the ‘asset turnover ratio’. For example, if your annual sales are high asset turnover ratio conveys more efficiency in the management of assets.
In the retail industry, an asset turnover ratio above 2.5 is considered to be good.

3)    Inventory Turnover Ratio

          The Inventory Turnover ratio represents how many times a business sells its entire stock of goods and replaces it in a year.
By dividing your cost of sales by your year-end inventory, you get your inventory turnover ratio. An inventory turnover ratio between 5 and 10, is considered to be good. It means that you restock your inventory every 1-2 months.

4)    Customer Retention

         It’s more expensive to acquire new customers, compared to the money spent in retaining your old and current customers. Hence, the latter always needs to be in foresight of your business plan. Retaining your customers while acquiring new ones is truly the most vital element of sustaining your business and taking a step forward. If your customer inflow is high, then so is your cash inflow.

By following the above simple steps, you are bound to get a basic idea of measuring the financial health of your business.

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