You can have a great product, a brilliant team, great sales outlets and more. But if your company’s finances are disorganized, the success of your business will undoubtedly be compromised.
According to data from Dow, 48% of companies close within three years and the main reason is the lack of efficient management. To prevent this from happening, a simple solution is to carry out a good financial diagnosis.
But do you know what a financial diagnosis is, how important it is, and how to put it into practice? In this article, you will find all these points explained in a very practical way for you to apply in your business and say goodbye to financial disorganization. Enjoy reading!
What is a financial diagnosis?
Rather than just being an analysis of balance sheets and financial statements, it’s an exhaustive study of different parameters that affect your enterprise. It functions as an x-ray that lays bare the company’s weaknesses and strengths, usually unseen.
According to the outcome of the diagnosis, it is possible to make more confident decisions and take proactive steps in order to make your business sustainable.
When to do a financial diagnosis?
Financial diagnosis is important for any company. However, in some situations it may be even more urgent.
As Steve Jobs said , you can either view a mistake as a mistake to be forgotten or as a result that points you in a new direction. So if your company’s finances are out of control, it’s time to change course and focus on getting organized.
Below, we have listed some points of attention that you need to observe to know that it is time to carry out a financial diagnosis of your company.
Falling profit margins
If profit margins for your business are consistently dropping, it is time to check what is going wrong. A thorough financial review will enable you to isolate particular areas in which your costs are increasing or revenues are declining and enable you to create an action plan to correct things.
Growing debt
If you’re struggling to meet your financial obligations and your debt is mounting, a financial assessment can reveal debt reduction strategies, renegotiation of terms, or even debt consolidation to help ease the financial pressure.
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Mismatch between expenses and income
If your costs of operation are consistently running above your income, that’s a bad sign. A financial evaluation will give you a clear picture of your business and allow you to see areas where you can cut costs, simplify processes, or diversify your income base.
Lack of financial reserves
Having an emergency fund is the solution to counteract unexpected events or financial emergencies. If your company does not have a sizeable financial buffer, a financial appraisal will help you create sensible goals to establish an emergency fund and avoid potential challenges in the future.
Guide to developing a financial diagnosis
If you’ve read this far, you’ve probably already realized that knowing how to perform a good financial diagnosis is essential for the success of your business. However, more than knowing how to perform this assessment, it’s necessary to transform it into a regular process. The step-by-step guide below will be very useful for establishing this process. Check it out:
- Be clear about your income – This is the first step to starting the financial analysis and can be done in a simple way: access the latest numbers recorded by the company and locate the cash inflows.
- Highlight the amounts receivable – It is crucial that you know everything that is receivable in your business. One tip is to highlight, during the financial analysis, the amounts from the previous month compared to those from the month that has already ended.
- Be aware of your skills expenditure – Always keep track of skills expenditure, such as salary payments and training.
- List other expenses – Taxes, contributions, all of these elements should be included in your expense spreadsheet.
- Identify the cost of your inventory – Evaluate all the expenses related to your inventory and how much it costs to keep it up to date.
- Monitor the final result – Monitoring the results of the financial analysis implies committing to the entire planning process. It is through this analysis that you will be able to outline strategies and make better decisions, according to the needs of your company.
Main advantages
A thorough financial analysis can benefit your company in a number of ways, such as:
Comprehensive vision
A financial diagnostic helps you gain a clear and objective view of your company’s financial health. The metrics and key indicators provided will help you understand your company’s current financial position in relation to its goals and industry best practices.
Identification of areas for improvement
By performing a financial assessment, you can identify specific areas where your business needs to improve. This could include reducing costs, increasing operational efficiency, improving the sales cycle, or strengthening pricing strategies.
Making informed decisions
With a financial diagnosis in hand, you will have reliable information to support your decisions about the direction of your business. This will help you minimize risks, avoid future financial problems, and take proactive measures to improve your company’s financial health.
Effective strategic planning
By knowing the real financial situation of your company, you will be able to develop a strategic plan that is both realistic and efficient. This will involve setting realistic goals, allocating resources appropriately, and identifying opportunities for growth and expansion.
Access to finance
If your company needs financing to expand or invest in new projects, a solid financial assessment will be a valuable tool to present to lenders and investors. It will demonstrate your understanding of the company’s finances and your ability to manage financial resources appropriately.