Assessing the Financial Health of Your Business

Purpose-driven entrepreneurs run healthy businesses. The financial health of your business tells the entrepreneur and other stakeholders how well your business is doing and measures its sustainability. From personal experience as well as the experience of my clients, having an unhealthy financial structure in your business is a recipe for disaster. As we see from the experience, we are going through with Covid-19, an unhealthy anything can be harmful, can lead to a pandemic, and can be potentially fatal in the long run. However, when your business health is assessed, you get a diagnosis, and with a diagnosis, you get the opportunity to stop the route cause from continuing to fester by implementing a proper treatment system. So, let’s get into two of the steps you need to follow to assess the financial health of your business and how to treat any problems identified. Step 1 Are you keeping your personal and business finances separated? This might seem to be obvious to some but I cannot tell you how many business owners neglect to do this, not necessarily because they don’t know better or don’t wish to be compliant but because, as human beings, we tend to move towards what’s convenient. Even when there are separate bank accounts, if the business owner is going to make a purchase for business and home at the same time, it’s more convenient to put both purchases on the same card. And as simple as that the commingling begins. Business expenses are deductible. Personal are not. So, you follow this practice of mixing the two several times throughout the year and here are the consequences. First, you are faced with the task of digging through personal and/or business bank statements to separate what’s personal and what’s business so you can account for those appropriately. Could the hours you spent doing that have been used efficiently? All you needed to do in the first place was pay for business purchases from your business account and pay for personal purchases from your personal account? I know you could use that time on some moneymaking tasks in your business, such as strategizing and actualizing sales, lead generation, and product development. Second, you may decide it’s too much work to dig through and separate, in which case you’re faced with two options. One, leaving it all as personal, thus not taking advantage of the business deduction you are entitled to. Who wants to do that and leave money on the table? I know you don’t. Or two, taking it all as a business expense, which is not allowed under the tax law. Remember I said, business expenses are deductible and personal are not. I know you do not want to mess with Uncle Sam. That is not a good idea. So, you see, in either scenario, you are stealing, either from yourself or from the government. You do not want to do that, either. Therefore, your best course of action is to always separate your personal and business finances. How do you do that? By keeping separate bank and charge accounts for your business that you specifically use for business expenses. This is not only useful for tax purposes but also so you can have a clear picture of what is going on in your business, which leads me to our next assessment point. Step 2 Do you have a system in place to track your finances and provide you with financial reports periodically, minimally monthly? Here’s news for you. Your PayPal and Stripe statements are not enough. You want to be able to see not only total monthly revenue at a snapshot but also broken down by revenue type. By revenue type I mean the source of your revenue. For example, as an accountant, my company offers tax planning services, tax preparation services, payroll services, and basic bookkeeping through CFO services. We would want to see how much revenue is being generated from each of these service categories so that we know which stream of revenue is profitable, may need more attention, or may need to be eliminated. For these reasons, it is important that we have a system in place that can break this all out for us. The same is true for expenses. As a business owner, it’s important to know how much you are spending on contractors, on advertising and marketing, on rent, on utilities, etc. And then you might want to break down those categories even further into subaccounts where, for advertising and marketing, for example, you might have subaccounts such as FB ads, printed material, newspaper advertising, promotions at conferences and other events, etc. Tracking your revenue and expenses allows you to become more financially aware of what’s happening in your business and gives you the opportunity to manage your money better. One of the main reasons that businesses fail is a lack of cash. Neglecting to track your revenue and expenses can get you on that path quickly. Therefore, I recommend that you institute a tracking system in your business immediately if you haven’t already. The system we use with our clients is QuickBooks Online, a software that helps business owners keep everything organized in one place, so they are tax ready all year round and provides the reporting needed to help them make smarter business decisions. For five more steps you should follow to assess your business financial health, grab my Business Financial Health Check Guide at https://erjservices.com/businesshealthcheck/. Get in position with a firm financial foundation and on the path to increased cashflow and profits.
About Dr. Ranelli Dr. Ranelli A. Williams is a Certified Public Accountant, financial educator and profit strategist, best-selling author, and award-nominated speaker, empowering service-based entrepreneurs to take control of their money as they work towards building a strong financial legacy.
She co-owns a tax and accounting business, ERJ Services (www.erjservices.com), along with her husband Eric, helping their clients organize their financial data so they build a strong financial foundation, prioritize cashflow and profits, and strategize to pay only the minimum legal taxes.
She is also the founder of R.A.W. Legacy Solutions (www.ranelliwilliams.com) as well as Profitable Entrepreneurs Network, a community of career professionals turned service-based entrepreneurs who are looking put a solid financial structure in place so they can focus on getting paid for doing what they love and building their business to 6-figures and beyond. Her ultimate goal is to help her tribe experience continued growth and expansion, keep their hard-earned dollars secure, and build a debt-free legacy.