Ever wondered how healthy your business is? Like seriously sat down and thought, “If my business ‘got sick’ today, what would happen?” Not many people actually do this for their business! As long as you’re bringing in that revenue, your good right? I’m here today to bust that myth, giving you the 3 questions that you should ask yourself when considering your companies financial health.

Gross Margin

Your Gross margin is probably one of the simplest calculations that you can do to get a quick snapshot of your company’s financial health. The simplest way to calculate this is that you sum up all the money that you made on a specific product, subtract the cost that you incurred to make and sell the product, then divide that total by the sum of all the money that you made. Say for example that you are a wedding photographer. You made $50,000 in the last 6 months taking photos, great job! Now, it cost you $15,000 in costs over the last 6 months to travel to those weddings, for lens rentals associated with those weddings, and fee’s from your CRM software when you booked those clients. To calculate your gross margin, you would perform the following equation:

($50,000 – $15,000) / $50,000 = 70% Gross Margin.

 That’s it! Gross margin tells you how efficient your business is producing products (ie. How much they cost in relation to how much money that they make the business). When you calculate your gross margin for a given product or service, you are able to pinpoint what products are costing you more time and effort, or maybe just aren’t priced right.

Cash Balance

In the simplest terms, cash balance indicates how much of a cushion your business has. You may like to have more or less cash than others, but the main rule of thumb for small businesses is to have 6-12 months of operating expenses on hand at all times. This means that your business should be able to pay the bills for 6 months to a year without any new revenue coming in. I know I know… This is a long time! And, you are an entrepreneur! You will have at least SOME amount of money coming in over that period of time no matter what! I get it, I have confidence in you too! But, to have cash means to have agility. You can respond quicker to an emergency, OR an opportunity that you didn’t know would come forward.

Accounts Receivable

Any businesses accounts receivable amount is a very important financial indicator. Your accounts receivable amount is the total amount of payments that you have coming into your business in the future. For example, If you are a creative and you charge for your work ahead of time, you will have a contract that sets forth payment terms. Maybe the client pays 4 separate payments, or even just 2 over the course of a few months. Once the contract has been signed, those payments are now in accounts receivable. They are due to you, and you can count on them coming when they are due, thus impacting how much money your business will make in the future. Having a healthy accounts receivable amount will help you solidify plans and ensure that your business can have sustained financial success.

There you have it! 3 questions to ask yourself about your company’s financial health. I hope you are able to take these questions and really look deeply at your company’s finances. As always, check out our podcast for more incredible info on small business finances.