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Tata Capital > Blog > Loan for Business > How to Measure Financial Health of Your Business?

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How to Measure Financial Health of Your Business?

How to Measure Financial Health of Your Business?

Conducting financial health checks are quite essential for your business. These portray a clear picture of how your business is performing monetarily. Such assessments also determine the areas that require immediate improvement to maintain a sound financial track.

Financial health checks allow you to make informed business decisions and clear hurdles while seeking loans, such as meeting eligibility criteria and bolstering repayment ability.

Here are some crucial business financial health factorsthat you must assess: -

Analysing Your Balance Sheet

Your company’s balance sheet helps to assess its financial position at a particular time. It displays the business’s liabilities, assets, and owner’s equity. Here, assets refer to what your organisation uses for business operation, liabilities indicate the repayable cash borrowed from other sources, and owner’s equity shows what financing the owner has invested. And assets should equal the owner’s equity and liabilities’ sum, as per this equation:

Assets = Owner’s Equity + Liabilities

Evaluating balance sheets is one of the most crucial financial health measures for business.It shows how long it’ll take to utilise the company’s on-hand inventory, how much debt exists concerning the equity, the tangible assets, etc.

Additional Read: What is the Role of Balance Sheets on Getting a Business Loan?

Conducting Cash Flow Tests

Cash flow is your company’s money movement and a vital metric for financial health checking. By running a cash flow test, you can assess if the money entering and leaving your enterprise is well-balanced. If not, that’s a financial risk sign.

A low cash flow indicates challenging times for paying employees, creditors, suppliers, etc. Assessing it beforehand can help you take the necessary steps for avoiding crisis. Financial assistance, such as getting a business loan, is ideal for maintaining the cash flow and keeping payments consistent.

Calculating Leverage Ratios

Leverage ratios display how much your business relies on debt financing versus how much equity it has for funding its assets. You can evaluate it through the formula:

Leverage ratio = total liabilities divided by equity

The leverage ratio is quite significant when availing further funds. The higher this ratio, the more challenging it’ll be to acquire borrowings. Hence, looking for favourable business loan interest rateswill be the least of your worries, as lenders hesitate from granting support for business with higher leverage ratios.

Additional Read:  Problems Faced by Businesses Due to Poor Finance Management

Analysing Your Income Statement

Your company’s income statement displays its expenses, profits gained, and revenues. By assessing this, you can understand your business’s financial health by calculating the following:

  • Revenue growth over specific accounting periods
  • Net profit’s revenue after all expenses paid
  • If your company can cover its debt interest repayments
  • The gross profit margin for the products/services sold

Get the Right Support Your Business Needs

If you need funding to maintain good financial health, choose Tata Capital. From attractive interest ratesto collateral-free funds, high eligibility, etc., our business finance offerings guarantee the required assistance, hassle-free.

Our business loan EMI calculator is there to help you calculate your EMIs as well! To use it or know more about our financing, visit our website today.

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