How to Run a Financial Health Check for Your Business

Your accountant will scold you for not keeping a balance sheet or income statement. Yes, maintaining accurate reports is important for any business. But what do you do with your financial documents once they’re in your hands? Analysing your financial data is just as important as collecting it.

You should run a business financial health check periodically. An annual report is prudent for the success of your business, but you may run a check more often if you are growing quickly.

Not sure where to begin? Let’s talk about the steps to taking your financial reporting and turning it into meaningful insights about the direction of your business.

Steps to determine your business’s financial health

A financial health check helps you determine if your business is meeting its financial performance expectations. Fair warning: To do the job thoroughly, you need to analyse multiple documents and compare many financial ratios. In other words, you can’t simply look at your bank statement to determine if you’re doing well.

To run a complete financial health check for a business, you should look at your balance sheet and income statement, analyse your current cash flow, and look at common financial ratios related to your debt and equity.

Analyse your balance sheet

A balance sheet is an important bookkeeping document. This report reveals the financial liquidity of your business at any given moment in time (how quickly could you pay off your current debts?). It also reveals the state of your working capital, or whether or not you have the cash to complete day-to-day operations.

Your business’s balance sheet lists assets on one side and debts and stakeholder equity on the other side. In short: Assets = Liabilities + Equity. The two sides of a balance sheet should even out. If you are doing well, your assets will be in the positive and continue to grow over time.

A balance sheet with errors, or a series of balance sheets that trend toward more liabilities than assets, may be red flags about your financial health.

Analyse your income statement

An income statement is a bit more specific than your balance sheet. It narrows its focus to your earnings and expenditures during a certain period of time, often a financial quarter.

This report reveals whether you have experienced profit or loss during the time period covered in the document. In fact, the report is often called a profit and loss statement. Your gross profit is determined by taking your revenue and subtracting the cost of goods sold.

If your income statements have an upward trend, you are likely in good shape. However, an income statement may also reveal that your expenses continue to outpace your revenue — not a good sign.

Analyse your cash flow statement

A cash flow statement measures the money or money equivalents that are coming in and out of your business. It doesn’t look at revenue like your income statement does, but rather answers the question: Where is our money going?

You can use a cash flow statement to identify seasonal trends. For instance, you may notice that costs are higher during certain periods of time. The sale of your goods and services may also wax and wane over the course of a year. Comparing cash flow statements can help you identify when to buy materials and when to market certain products. 

There are several main components that should go into your cash flow analysis:

  1. Opening balance. How much cash and cash equivalent do you have on hand at the start of the analysed period?
  2. Cash incoming. How much money came in from sales, grants, tax rebates, and other sources? You should calculate your total cash incoming. 
  3. Cash outgoing. What did you spend on purchases, rents, marketing, payroll, and other expenditures? Calculate your total outgoing cash. 
  4. Closing balance. When you subtract the total cash outgoing from cash incoming, are you left with a positive or negative number? 

Look at financial ratios

There are several key ratios often used during a business financial health check. 

  • Profit Margins: Your business has a gross profit margin and a net profit margin. Your gross profit margin measures your profits per sale before expenses. Your net profit margin reveals that percentage of each sale that counts as profit after expenses. 
  • Coverage Ratio: Broadly, a coverage ratio measures whether your business can pay its debts. But coverage ratios are often broken down into more specific expenses. For instance, the earned interest ratio tells you whether you can make interest payments. The formula is: earnings before income and taxes/interest expenses. You should aim for an interest coverage ratio of at least 2:1.
  • Current Ratio: This figure tells you whether you can pay your debts that are due in the short term. Divide your total current liabilities by your total current liabilities. A healthy ratio is at least 2:1. 
  • Debt-to-equity ratio: Your debt-to-equity measures how many of your assets are being funded by liabilities, or borrowed money. The lower the percentage, the better. 
  • Return on equity (ROE): This formula measures how efficient you are at generating profits. ROE is determined by dividing net income by average shareholders’ equity. 
  • Return on assets (ROA): Similarly, ROA determines how well you use assets to create income. Net income is divided by total assets. 

Need help determining your business’s financial help?

As a burgeoning business, running your own financial health check can lead to honest mistakes. And, well, even an established organisation can use a lot of help. As income streams evolve and the expenses of your business change, it can be hard to make heads or tails of whether you’re on the right track. 

A trained professional can do everything from keep your payroll to offering CFO-level insights into your financial habits. An outsourced bookkeeper can keep your accounting expenses low while offering meaningful analysis and keep your documents in order. Sign up for Visory’s free financial health check to see if your business is headed in the right direction.

How Outsourced Bookkeeping Services Can Help Not-For-Profits

Australia has a large and diverse not-for-profit (NFP) landscape. In all, there are about 600,000 nonprofit organisations throughout the country. NFP groups need to maintain accurate financial records just like for-profit companies, and they often have unique complications. Nonprofits, for instance, are often responsible for mandatory audits and report to more governing bodies than for-profit businesses. 

Having a bookkeeper on your side who is well-versed in NFP finances can be a real lifesaver. As an organisation that may not have a lot of money to spend, outsourcing your bookkeeping is probably the most cost efficient option. Outsourced bookkeeping for nonprofits allows you to tap into expertise without hiring a full-time accountant. 

Read on to learn more about how outsourced bookkeeping for nonprofits can keep your organisation’s reports on track. 

Save time to focus on your nonprofit’s mission

NFPs are bound by a variety of rules laid out by the Australian Charities and Not-for-profit Commission (ACNC). And that’s on top of the standard accounting needed to keep any organisation from going broke. Between daily accounting and payroll and annual reports — you could spend hours per month on your books. 

Outsourcing your bookkeeping needs means your back office staff suddenly have more time for what matters: your organisation’s mission. If your executives are getting stressed out about filing their own reports, it’s time to call in some assistance. You can still receive and review your necessary reports without being responsible for creating them. This means staff are still knowledgeable about your financial position, they just don’t have to labour over the number crunching. 

Minimize your nonprofit’s financial risk

Even a well-intentioned staff member can mismanage your money. And, some not-for-profits rely heavily on volunteers and temporary workers, which can make trusting people with your books more complicated. You may have a rotating carousel of workers at your NFP who are responsible for your reporting. What happens when they depart from their role and the next person doesn’t know where to pick things up?

Outsourcing your bookkeeping gives you a reliable contact who will never abandon your books. And experts are less likely to make a mistake than a part-time staff member who is already overwhelmed. 

Risks with mismanaged funds are significant for not-for-profits. A missed audit report or improperly lodged taxes can lead to serious penalties and fines. Outsourced bookkeepers are also impartial. They can do an objective risk assessment and tell you honestly where you need better financial safeguards or reporting in place. 

It’s important to keep in mind that financial errors snowball. If you lodge an incorrect 2020 tax return, some of the data on your return for 2021 may also be wrong. A bookkeeper can look over historical documents to make sure you’re not working with erroneous reports. This mitigates your long-term risks as well as correcting your current reports. 

Stay compliant with all relevant filings

Your nonprofit may be responsible for a variety of reporting. An outsourced bookkeeper can help you stay up-to-date on all necessary filings. Reports you may be responsible for include:

  • ACNC statements. If your not-for-profit charity is registered with the ANCN and has an annual revenue of more than $250,000, you must supply them with annual financial statements. The reporting must be sent within six months of the end of your financial year. NFPs who generate less than $250,000 per year still need to send an Annual Information Statement. 
  • Constitutional requirements. Most not-for-profits have a constitution which guides the organisation’s rules and regulations. This often includes how often you need to create financial reports and to whom they need to be supplied. 
  • Local regulator reports. Depending on the state where your nonprofit is located, you may also have to submit financial records to a local regulator. In New South Wales, for instance, you must lodge a Summary of Financial Affairs with NSW Fair Trading. The statement must be submitted within one month of your annual general meeting, or within seven months of the end of your fiscal year.
  • Audits. Many not-for-profits are also required to lodge a full audit of their finances to a local entity. In Queensland, your financial statements must be audited by a registered company auditor. 
  • Reviews. Some small nonprofits may not be required to submit to a full audit, but rather a review. Think of this process as Audit Lite. A certified member of the Chartered Accountants Australia and New Zealand, CPA Australia, or the Institute of Public Accountants will go over your financial statements to test for accuracy and completeness.

The intricacies of a nonprofit’s financial reporting are evolving and complicated. It’s a lot for your staff to handle when they are also tackling other responsibilities. An outsourced bookkeeper who knows a lot about your not-for-profit industry will stay current with your organisation’s legal requirements. 

Take advantage of experience and top accounting software

A not-for-profit organisation may not have access to the latest accounting software. It’s understandable for you to spend your precious resources elsewhere. But what happens when the tax codes change or your state alters the required reporting? You may be lost. 

A dedicated, outsourced bookkeeper has not only the expertise to understand the needs of a not-for-profit, but also has the newest version of important accounting software. The top accounting tools can make it easier to create and send everything from a balance sheet to accounts payable reports. With an outsourced professional at the helm, your NFP can tap into the newest ways to expedite financial reports and catch mistakes. 

Is outsourced bookkeeping right for your organisation?

Is your not-for-profit growing? It may be time to turn over your books to a professional. An outsourced bookkeeper can do everything from record your donations to lodge your annual reviews and audits. You will be kept informed every step of the way without having to put in your own elbow grease. 

To find out how bookkeeping professionals can make your organisation run more smoothly, learn about how Visory’s bookkeeping service can help your nonprofit.

Guide to The 4 Financial Statements That Bookkeepers Prepare

Bookkeepers make sure your business runs like a well-oiled machine. They can tackle your payroll, pay all of your bills on time, and spot accounting errors. Once you work with a professional bookkeeper, you’ll wonder what you ever did without one. 

Among the most important tasks of a financial bookkeeper is maintaining your essential reports.  The types of financial statements you’ll assign to a bookkeeper include: income statements, balance sheets, cash flow statements, and statements of owner’s equity. Combined, these accounting documents reveal the financial health of your business. 

Which types of financial statements do bookkeepers prepare?

Financial reporting serves a few key purposes for any business. Accurate reports allow your business to:

  1. Understand the current assets and debts for your business. 
  2. Identify positive or negative trends in revenue and spending. 
  3. Make informed decisions about how fast to scale up. 
  4. Know when you can and can’t afford to hire new staff. 
  5. Provide concrete financial numbers to provide to potential investors. 

Four of the primary documents your bookkeeper will prepare for you are outlined below. Are you familiar with these bookkeeping reports? You should be.

Income Statement

An income statement, sometimes called a profit and loss statement, tells you what you spent versus what you earned in a particular time period. The report usually has two headings: Revenue and Expenses. You want revenue to exceed expenses at the bottom of the page. This yields a net profit. 

You can create an income statement over any period of time. Many businesses do them monthly, quarterly, and/or annually. By comparing income statements from different time periods, you can begin to understand important trends. When are your costs the highest? During which months do you have the most sales? Your bookkeeper will have plenty to analyse. 

The ultimate goal when producing an income statement is to make sure you didn’t spend more than you earned during a particular period of time. You also want to use what you learn from an income statement to figure out where you can cut costs and generate more revenue to increase your net profit. 

Balance Sheet

A balance sheet goes one step further than an income statement. It looks at the big picture of your business at a specific point in time, considering data beyond revenue and expenses. More specifically, a balance sheet outlines your total assets, total liabilities, and total shareholder equity on the day you create the report. 

Your assets include the cash in your bank account, any property that you own, and other physical assets that can be turned into a profit in the future. Business liabilities include outstanding vendor bills, loan balances, and any debt that must be paid in the near future. Your shareholder equity is the percentage of your company that is currently owned outright by the owner of the business.

Balance sheets have two sides. In one column, you list your current assets. On the other side, the current liabilities and stakeholder equity. The two sides should be equal. Assets = (Liabilities + Shareholder Equity). 

Your balance sheet reveals how liquid your business is, how efficiently you are using your assets, and whether you have any financial wiggle room to have a bad quarter. Over time, you want the balance sheet to trend in an upward asset direction. As you pay down liabilities, your assets and equity will increase. 

Statement of Cash Flow

The vast majority of slow businesses that fail, do so because of cash flow problems. This makes cash flow statements some of the most important financial reporting your bookkeeper will do. Your cash flow statement tracks the inflow and output of cash and cash equivalents for your business. 

Read More: What is a Cash Flow Statement?

Your cash flow statement usually has three main sections: operating activities, investing activities, and financing activities. Operating cash flow relates to your businesses core business. The sale of your goods and services falls into this category. Investing cash flow will encompass things like buying or selling property. Financing activity cash flow covers getting cash from an investor or bank, and paying interest on a loan. 

The ultimate goal of a cash flow statement is to find out how much cash your business has on hand. You can produce a cash flow statement as often as you think is relevant, though likely not more than once a month. 

Statement of Owner’s Equity

The owner’s equity reflects how much the owner possesses outright. If your business is worth $100,000 and you owe $50,000 in liabilities, the total equity is $50,000. A statement of owner’s equity is a document that explains any changes to the equity section of your balance sheet. 

Your statement begins by outlining the beginning equity balance during the time period being measured. Then, you factor in net income and the owner’s contributions. Finally, the statement considers any net losses and the owner’s withdrawals. This leaves you with an ending equity balance. 

The goal of your statement of owner’s equity is to determine if your equity is trending up or down. If you have lost equity in the business, your bookkeeper can analyse what net losses or additional debt affected your equity. 

Getting help with your financial reporting 

There are many benefits to regular financial analysis. Reporting helps you identify your liquidity, spot positive or negative trends, and incentivise investors to consider your business. As your business grows, it’s difficult if not impossible to keep up with your reports without a dedicated bookkeeper. The types of financial statements required to run a thriving business might be done quarterly — but they rely on an accurate accounting of daily transactions and weekly invoices.

You don’t have to get lost in the woods. There are experienced bookkeepers waiting to help you file essential reports. They can also offer meaningful insights about your financial health. Learn more about Visory’s bookkeeping services today. Our industry experts can help your business thrive and offer CFO-level advice about your financial affairs.