How do you know your company is financially fit? We all talk it to death: profit, profit, profit. And for good reason—your profitability, and therefore your profit margin, is the single best measure of company health. However, it is a mistake to think that is all there is to it. There are other metrics you should be using to gauge company health.
How is your current operating efficiency, or your brand strength at the moment? What about your ability to pay debt over the long-term? Is your long-term return on invested capital (ROIC) accelerating or slowing, and how does it relate to your industry peers? Both short-term metrics and long-term metrics matter.
Your company’s financial fitness should include revenue growth, size growth and client growth. And, the metrics you use should be industry-specific based on thorough analytics. Don’t know where to start? That is where we come in with our awesome accounting team. But, in the meantime, you can begin your company health check by looking at the following measures.
The Best Measures of Company Health
Innovation matters for certain businesses more than others. Know the consumer trends. Is this a fad or is your brand here to stay? Customer acquisition may play a greater role in measuring the ability for long-term growth in industries like Subscription-as-a-Service (SaaS). That is why you see so many SaaS companies offering discounts for referrals. The referral is saving them more on customer acquisition cost than the cost of the discount.
Liquidity (Asset Health) & Solvency (Debt Health)
Liquidity is the short-term ability to cover your debts. A greater liquidity in your cash and convertible assets plays into your financial health in the overall value of your company.
Measures: current ratio & quick ratio
Solvency is the ability to pay debt and long-term expenses on an ongoing basis. In other words, do your assets cover your debts? Having more equity than debt with a downward ratio trend is a good thing. You want your shareholders financing the operations more than your creditors (that said, increasing your debt to take advantage of an awesome new opportunity can be worth it if properly vetted first, but don’t rely on debt for normal operating expenses).
Measures: debt-to-equity ratio
Operating Efficiency (Cost & Productivity Health)
Your inventory and working capital should be efficient, well-oiled machines. This reflects well on your company and proves it is being managed effectively while controlling costs. If the inventory and capital are not, perhaps it is time to rethink your current management. (Or your current accounting team!)
Measures: operating margin & inventory turnover
The Bottom Line
Finally, the bottom line: is your company turning a profit?
Measure: net margin profits/revenue (net profit may be in the millions but if net margin is only 0.5% it’s not a financially “healthy” business).
Taking into account your industry peers in your market, a business with a larger net margin typically indicates your company’s health is in the black. And a healthy company is ready to grow! What’s more awesome than that?!