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Business financial health check
Use this checklist to make sure you have the financial basics in place and find ways to improve your finances. The list includes links to information that can help you answer the questions as well as financial tools and templates you can download.
Topics included in this checklist:
- Wages and staff
- Managing Suppliers
- Customer and pricing basics
- Sales and marketing
- Bookkeeping and finance
- Improving finances
- Managing your relationship with your lenders
1. are you paying yourself a decent wage?
Your wages should come from the sales revenue you've made after you've taken out all your expenses.
- calculate your net margin (which is the sales dollars left after subtracting both the cost of goods sold and the overhead expenses) and gross margin (sales dollars left after subtracting the cost of the goods sold from net sales).
2. if you're an employer, are you keeping up with all your employer legal obligations e.g. PAYG withholding and superannuation?
PAYG obligations are usually part of a quarterly tax office return. This payment should be recorded on a separate line in your cash flow statement, so the money is put aside and you're not caught short every quarter.
- find out what your PAYG and superannuation obligations are
- use the financial statement template to produce your cash flow statement.
3. are you keeping up with the bills you owe other businesses e.g. payments to suppliers?
Owing other businesses and the tax office money is one of the first signs your business does not have a strong cash flow.
- manage your supplier payments
4. do you have good working relationships with your suppliers?
If you're dealing with a supplier who suddenly changes their terms of trade, particularly when it comes to credit arrangements, you may need to renegotiate your agreement, or even find a new supplier.
- find out how to manage your supplier relationships and payments.
5. are your payments to suppliers continually late?
If you continually pay your suppliers late, then you will be at risk of damaging the relationship and forcing them to reassess payment terms, which will have a direct impact on your cash flow.
- manage you cashflow by completing a cashflow forecast statement.
6. if your customers owe you money, do you know how much is owed and how overdue the payments are?
If your customers owe you money which is outside of your credit terms, you need to act swiftly to collect this money.
- find out how to manage your customer debts.
7. do you know what your breakeven point is, and have you priced your goods or services to cover the breakeven and profit margin?
Knowing your breakeven point (the total cost of producing a product or service) is essential in making sure you are charging enough to cover costs and making a reasonable profit.
- calculate your breakeven point by downloading the financial statements template.
8. do you have an understanding of what your gross profit is?
Gross profit is your net sales (sales after you take into account your returns and deductions) minus the total cost of what you’ve sold. You should be able to track this and it should be enough to cover all your expenses and leave enough net profit for the owners of the business.
- calculate and monitor your gross and net profits.
9. are you reviewing your cost structure quarterly and considering increasing prices to cover rising costs?
Your cost structure should not be set in concrete. Profitable businesses have regular reviews and make allowance for rising costs.
- conduct market research to identify marketing opportunities and a pricing strategy.
10. are you competing with other businesses using strategies other than your price?
If you have many direct competitors and your only selling point is to be one of the cheapest, your margins will always be slim and eventually someone will undercut you. Work on creating points of difference with competitors which you can advertise.
- benchmarking can help you plan and implement changes to boost your business performance
- find out how to improve your sales, target the appropriate customer group and keep them through loyalty programs
- assess your marketing campaign by conducting market research to find out where your sales techniques and market reach can be improved.
11. does either of the two success factors for profitable businesses - increasing revenue or decreasing expenses - apply to your business?
These are the two key questions in financial turnaround. Can you increase your customer base or is there room in the market to sell at a higher price? And what non-essential expenses can be reduced without affecting your service?
- increase your income by planning more strategically to grow your business
- review your expenses and look for places you can cut back.
12. do you have a bookkeeping system in place?
This can be as simple as a record keeping book from the newsagents, or purpose-built software e.g. Quicken or MYOB. It should be kept up to date and show you the exact state of your finances.
- set up a bookkeeping system
- download the checklist on business records and how long to keep them, including financial and employment records.
- find out if you need to register, report and pay GST.
13. do you speak to your accountant more than once a year?
An accountant who regularly checks your finances will help detect potential problems and provide suggestions for ways to improve your business.
- download the checklist - questions to ask my accountant for sample questions to ask your advisor on ways to improve your business
- find contact details for accountants, bookkeepers, lawyers or business advisors by using the find an advisor online tool.
14. is your business continually reliant on overdraft or other financing facilities?
This could indicate that the income earned in the business is not sufficient to cover all expenses or that your customers are not paying in line with your payment terms.
- choose the right kind of finance for your business
- find out how to manage your customer debts
- analyse your business financial health using these financial ratios
- use the financial statement template to produce your cash flow statement.
15. do you have a projected cash flow for the next 12 months?
This is important in being able to determine if your business can not just survive but also prosper. Anticipating when and how much money is coming in and going out are critical to maintaining a positive cash flow, particularly if you’re thinking about expanding.
- download the cash flow worksheet to forecast and record cash flow
- create a budget to enable the planned financial operation of the business to be measured against the forecast.
16. do you carry out financial checks to make sure your finances are accurate, complete etc.
Putting financial checks (known as financial controls) in place to is a way to make sure you have good control over your finances. It is used to ensure information is accurate and detect and/or prevent errors, theft or fraud, or policy non-compliance in a financial transaction process.
- download the checklist – financial checks to assess if you have good financial checks in your business.
17. do you have processes in place to encourage customers to pay debts promptly?
When a customer buys from you on credit, the cash they have yet to pay you is an outstanding debt. By using efficient debt collection processes you'll have a better chance of being paid on time.
- download a checklist on managing debtors to compare your existing procedures for collecting outstanding amounts from your customer and help identify possible improvements.
18. do you have stock control processes in place?
Good stock management involves buying the right amount of stock for your customers, knowing what stock you have bought too much of and finding a way to convert these into cash as quickly as you can.
- download a checklist on managing stock which will help you determine what measures for stock control you may need or can be used to improve to your existing procedures.
19. can you negotiate better terms with your suppliers?
Review the terms with each supplier regularly. If you find an alternative supplier that can provide better terms, discuss this first with your existing supplier before changing over - your existing supplier may be able to match this and will appreciate the loyalty you have shown
- get advice on how to negotiate with an existing supplier or select a new one by downloading the choosing and managing suppliers checklist.
20. are you thinking of applying for a loan?
There are a number of things to consider before you approach a lender including what type of loan you will need, how long you will need it for, interest and any one-off or ongoing fees that come with the loan.
- prepare a profit and loss budget and cashflow forecast to see if your business will need a loan and how much will be needed
- find and compare loan options for your business with the Business Loan Finder tool
- if you do not have financial assets to offer a financier as security consider getting a micro-enterprise loan.
21. are you thinking of refinancing or switching lenders?
Even if you're satisfied with the service quality of your lender, you should still meet with your financial institution once a year to discuss your financial needs, e.g. where they could improve their products and services. If you're not happy, shop around for a better deal before leaving.