The New Year brings with it a lot of business obligations. From quarterly tax statements to preparing tax documents for your employees by the end of the month, there’s a lot to do when the New Year rolls around. One of the most important things you can do at the end of this year is review your financial documentation for the past year to see if there are any concerns that need to be addressed early this year.
There are certain red flags to watch for that can let you know if your company needs financial assistance or even a complete overhaul to continue growing profitably.
Check your inventory.
If your business offers physical products, it can be bad for your company’s overall financial health if too much of your liquid capital is tied up in your finished products or in components to create your products. If the value of your inventory overshadows your outside investments, liquid capital, and internally reinvested capital at the end of the year, it may be time to consider how you’re making inventory and component decisions. While you want to have enough on hand to satisfy your customers, you don’t want to tie up all your available money in inventory, which leaves you financially vulnerable.
Check your liabilities.
If your debts, whether they are a mortgage for your facility or revolving lines of credit to purchase supplies, are higher than your assets, your business could be in trouble. While it’s important to re-invest much of your earned income each year into the business, doing so with credit can cause long-term viability issues for your company. If you have massive financial liabilities but do not have sufficient assets to offset them, it may be time to reconsider your financial practices. Doing so now could prevent your company from becoming insolvent in the upcoming year.
Evaluate your revenue trends.
Every business has good years and bad years, good quarters and bad quarters. Sometimes, there’s just no way to maintain the same level of revenue as you experienced in a particularly strong year the subsequent year. Fluctuations and changes aren’t inherently bad signs. However, if your company’s overall revenue as fallen for several quarters or several years in a row, it may be time to consider your situation carefully and adjust your internal practices. Whether that means a freeze on hiring or the decision to expand or shrink your offerings, reducing overhead can be a good way to improve revenue.
Is there an increase in your debt to equity ratio?
While it is common for new businesses to have more debt than equity, companies that have been in business for a year or more should have a stronger debt to equity ratio. If your company seems to have rising debt levels without proportionally increasing its equity at the same time, this could be an indicator that your business is taking on more financial debt than it can handle. If this trend continues for too long, payments on your debt could exceed your ability to handle them. This, in turn, could spell the end of your company or possibly bankruptcy to avoid closing your doors.
Evaluate your profit margins. Are they decreasing?
Whether you’re making physical goods, serving good, or offering a service to your community, your prices need to reflect your costs. Many businesses go several years without adjusting their payment or pricing schemes, which can result in a decrease in your profit margin. Over time, this can turn a once flourishing business into a company that can barely make ends meet. If your profit margins are shrinking, you need to figure out what is causing the shrinkage and make changes as soon as possible.
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