The Importance of Monitoring your Business Financial Health

The Importance of Monitoring your Business Financial Health

According to the 1,000 Day Survival Guide For Startups – Courtesy of Sanjay Mehta, If a startup is able to survive for 1000 days, then it is built to last. Now that your business has survived beyond the 1000 grey days, what next? For most of us, the epitome of the current pandemic has definitely changed the game for business models. Getting the right set of customers, investors, and other fundamental stakeholders that keep the business income flowing has not come without challenges. If this was the year you decided to set up a business because you heard your peers mention the famous Rwandan quote, Biashara ina pesa, then think again. Don’t get us wrong, we aren’t asking you to retract but rather assess your business model for long-term survival and health.

That said, let us look at financial health in this context. This refers to the dimensions of the monetary affair of a business - determined by:

  • Profitability - the ability to yield profits
  • Liquidity – the ability to convert assets into cash while retaining their intrinsic value
  • Solvency – ability to finance debts and financial obligations in the long term
  • Operating efficiency – ability to deliver products/services cost-effectively

So, what are the measures of business financial health? The fact remains, there is no sure way to determine a business’s financial health. However, there are significant indicators of strength or vulnerability. These are profitability and liquidity.

So many businesses have failed or stagnated, including those, we previously considered to be giants. One of the main causes of business failure that we have witnessed is a change in economies, whereby the economic environment influences purchasing habits, therefore, affecting supply and demand. We are currently witnessing the dynamic effects of COVID-19 uncertainties in the economic system owing to imposed lockdowns and curfew in a bid to control the spread of COVID-19. All is not lost and we have to find ways to adapt to the current economic environment and lead even at the edge of chaos.

We would, therefore, encourage you to assess the competitive ability to generate profits for your business as you strategize your new model. This will help you identify the balance of power, attractiveness, and profitability of your business in the market place. A great way to do so is using Porter’s 5 forces of competitive analysis to determine the following forces:

  • Threats of new entry - how easy it is to enter your market and threaten the current position of your business, as well as a number of barriers to entry
  • The threat of substitution - how easy it is to replace your current products/services.
  • Bargaining power of suppliers - where supplies are controlled by a few players in the market place
  • Bargaining power of buyers- where few buyers control a large percentage of the volume market
  • Competitive rivalries - the intensity of competition in the industry

This said, what can you do to safeguard or improve the financial health of your business? If anything, prevent business failure?

  • Monitor the cash flow of your business - never underestimate the power of cashflow
  • Review your non-performing assets
  • Measure your financial performance – Return on Equity (ROE)
  • Instill the culture of accountability/transparency in undertakings
  • Provide customer-centric products and services
  • Take stock of your value chains, lifetime value of customers, churn rates, net promoter score, and sales pipelines
  • Learn from your competition
  • Get business insurance to minimize financial losses in the event of diverse risks
  • Create a Continuous Improvement Plan - Plan, Do, Check, Act – continuously study and learn from current efforts to improve future outcomes

 Why, therefore, is it important to monitor your business’s financial health?

  • It is a crucial and cautionary step to prevent business failure
  • It helps you make informed short- and long-term decisions to drive the business forward
  • When you know your business inside and out, only then can you position it for success
  • It plays a vital role when making timely growth plans
  • Tracking Financial health transforms a culture of innovation and transparency amongst teams.
  • It eliminates unwanted and unjustified overhead costs
  • It helps to evaluate asset quality
  • It clearly reveals vital indicators of the performance of the business – These details are very important for shareholders.
  • It is an indication of good business compliance with the set laws in the nation

As we end this blog, we would like to leave you with some food for thought. Would you rather be the biggest or the best in your industry? We task you to marinate on that.

Your bank buddy

IMBA

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