Cash Flow is Not the Only Indicator of Financial Health

financial health

What steps is your business taking to protect its cash flow? Cash is king after all! We discussed some tips for managing and improving cash flow in this earlier blog: 5 Ways to Improve Cash Flow Today. We also covered tips for Making Sense of Your Cash Flow Statement.

Cash flow is most certainly an important indicator of your company’s financial health, but focusing on it exclusively can mean losing sight of the bigger picture. Aside from money in the bank, here are five other areas that should not be ignored when weighing up the holistic fiscal health of your business.

Price Points
While not necessarily a traditional key indicator, your prices are certainly a reflection of your business’ health as well as your ability to take the pulse of the marketplace.

Plan on reviewing your pricing two-four times per year and any time your costs change. Closely monitor accounts payable and use your cash flow statement to monitor any cost increases and make appropriate changes to ensure you keep making a profit. Likewise, keep watch your product margins and use the information to assess which products to stock to ensure profitability.

Don’t forget to keep an eye on the market. Are prices rising or falling? Are you still competitive? Did any newer products come into the market? Do you bring a value-add to the table that legitimizes raising your rates?

Lastly, monitor the conversion rates for certain products or services. For example, if you’re only converting one out of every 10 customers on a certain product, perhaps it’s time to lower your price – the increased volume alone could bring in more revenue. The takeaway here is never to assume that the price is right, so keep an eye on what’s selling and what isn’t.

Check out this free one-hour virtual workshop from SCORE for more useful tips on pricing for profit.

Profit and cash flow are very closely aligned, and the timing of the latter can have a big impact on the former. For example, if you buy inventory at $500 but sell it at $1000, at a glance your books will show a profit! But if your buyer is delinquent in paying for the item and six months later you find yourself still unpaid, that profit is meaningless as you scramble for cash to cover the bills that have accumulated in the interim.

So while profit is an important metric, relying on profit numbers alone can be deceptive since it only provides a snapshot in time and doesn’t take into account the movement of money in and out of the business (cash flow). Cash flow planning and management techniques can help you prepare for such eventualities and help you better align cash flow with anticipated profits.

Tax Liabilities
Tax laws are constantly in flux and staying on top of your liabilities as well as opportunities to reduce them through credits and deductions is particularly burdensome to small business owners. Some steps you can take to ensure you are benefiting from all the tax-reducing strategies available to you include hiring or consulting an accountant or tax adviser.

You can also take advantage of free workshops, webinars, and tools., for example, has an entire library of tips-based on-demand videos designed to help small businesses understand their tax obligations. Another great resource is the interactive Taxes and Credits tool that can help you determine which tax credits and other resources your business may be eligible for.

General Business Indicators
Aside from cash flow and taxes, there are a few more key indicators of business health that all business owners can count on to deliver restless nights.  I’m talking about key indicators such as the number of clients, prospects, conversion rates, number of sales and revenue per client. Regular sales and operational reviews will help you wrap your arms around this data and adjust your market strategies, cash flow projections, and budgets accordingly.

Trust Your Gut!
Gut instincts are also a valid indicator of the current and future fiscal health of your business – especially if your business is small and local. Unlike national economic surveys that rarely reflect what’s happening at ground zero in your town, do your own research. Assess local trends (you’re no doubt doing this anyway) – talk to customers, take stock of business openings and closings – you’ll soon get a good sense of what’s going on in your community. It’s an exercise that will be just as helpful to your business planning as having your finger on the pulse of your own economic indicators will.

Where to Find Help
If you need help wrapping your arms around all your data, there are numerous financial management apps that can help – Expensify, QuickBooks, inDinero, and FreshBooks – to name just a few. If you need in-person help, consider talking to the folks at SCORE. Sponsored by the U.S. Small Business Administration, they can match you with a business mentor (someone who’s walked in your shoes) and offer training and counseling specific to your business needs across a variety of functional needs including accounting and financial management.

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Tags: Financing