What Does The Financial Health Of Your Business Look Like?
A Guide to Understanding Your Business’s Financials
If I asked you right now, “How healthy is your business financially?” Could you answer confidently, backed by data?
Many business owners can’t.
They know their bank balance, roughly what’s coming in, and roughly what’s going out, but a true financial health check goes much deeper.
In my coaching and analysis work, I see businesses that are busy but broke, and others with modest revenue but excellent profitability and sustainability.
The difference? Understanding and actively managing their financial metrics.
Today, let’s take a look at what financial health means, key metrics to monitor, and how you can implement a simple, powerful financial review process to ensure your business not only survives but thrives.
What Is the Best Measure of a Company's Financial Health?
Why your business' financial health matters.
You wouldn’t drive your car without looking at the fuel gauge, speedometer or warning lights.
Yet, many business owners operate without checking their key financial indicators regularly.
The risk? Running out of cash, overcommitting on expenses, or missing growth opportunities because of underinvestment.
Good financial management is not about becoming an accountant.
It’s about understanding the numbers that matter and using them to make confident decisions.
Key Financial Metrics Every Business Owner Should Know
Here are the essentials you should review monthly (at minimum):
1. Revenue
Simple but often misunderstood.
Revenue is the total amount invoiced or earned before deducting any costs.
Tip: Track revenue trends over time (weekly, monthly, annually) to spot growth or decline patterns early.
Example:
A café owner I worked with noticed her revenue was stable overall, but digging deeper revealed weekday sales were declining while weekends were growing.
This insight allowed her to adjust roster and marketing strategies to address quieter weekdays.
2. Gross Profit Margin
This is your revenue minus the direct costs of producing your goods or services (cost of goods sold or COGS).
It tells you how efficiently you’re producing what you sell.
Formula:
(Revenue – COGS) ÷ Revenue x 100%
Tip: Compare your gross margin to industry benchmarks to assess competitiveness.
Example:
A trades business had a gross margin of 30% compared to the industry benchmark of 45%. Reviewing supplier pricing and job quoting uncovered undercharging on certain services, enabling them to adjust pricing without losing clients.
3. Net Profit Margin
Your bottom line.
Net profit is what remains after all expenses are paid, including wages, rent, marketing, utilities, and tax provisions.
Formula:
(Net Profit ÷ Revenue) x 100%
Tip: Aim for a healthy net profit margin suitable for your industry. Service businesses often target 20-30%, retail or hospitality may operate lower but need volume to compensate.
4. Cash Flow
Profit is not cash.
You can be profitable on paper but cash-poor if clients pay late or if expenses are mistimed.
Cash flow tracks money in versus money out.
Tip: Use a simple cash flow forecast spreadsheet projecting at least 12 weeks ahead to plan for upcoming tax, wages, or seasonal dips.
Example:
A landscaping business saw recurring cash crises each winter.
Their 12-week cash flow forecast revealed that invoicing delays from commercial clients compounded seasonal slowdowns.
They implemented upfront deposits and phased invoicing to smooth out cash flow.
5. Accounts Receivable Days
This metric shows how quickly you’re getting paid.
Formula:
(Accounts Receivable ÷ Total Credit Sales) x Number of Days
Tip: If your payment terms are 14 days but receivable days are averaging 45, it’s time to tighten collection processes or reconsider client credit terms.
6. Accounts Payable Days
How long it takes you to pay suppliers.
Extending payables (without harming supplier relationships) improves cash flow, but be strategic.
Tip: Negotiate extended payment terms with suppliers if possible, to align outgoing payments with incoming cash.
7. Break-Even Point
The revenue you need to cover all fixed and variable costs before making profit.
Tip: Knowing your break-even guides pricing, sales targets, and expense management.
Example:
A personal trainer calculated her monthly break-even was $5,800. Knowing this number removed anxiety during quieter weeks and focused her efforts to exceed it quickly each month.
Tools for Effective Financial Reviews
Here’s how to embed financial health checks into your routine:
1. Monthly Financial Dashboard
Create a simple one-page dashboard summarising:
Revenue
Gross and net profit margins
Cash flow position
Accounts receivable/payable days
Break-even
Tip: Visual dashboards (graphs and charts) help identify trends at a glance.
2. Weekly Cash Flow Check-Ins
Set aside 30 minutes each week to:
Review cash balance
Check upcoming payables and receivables
Follow up on overdue invoices
This simple habit avoids cash surprises and helps you sleep better at night.
3. Quarterly Deep Dive
Every quarter, do a deeper financial review:
Compare results to goals and last year’s data
Review expense categories for potential savings
Analyse underperforming products/services
Update forecasts for the next quarter
Tip: If numbers overwhelm you, involve your bookkeeper or accountant.
Their role is not just compliance but helping you interpret data to make decisions.
Interpreting Your Financials: Moving from Data to Action
Numbers themselves don’t improve your business.
It’s what you do with them that counts.
For example:
Low gross margin? Review pricing, supplier costs, or production efficiency.
Consistently low cash balance? Check if payment terms need tightening or if expenses can be delayed or reduced.
Declining revenue trend? Investigate marketing effectiveness, customer retention, and new lead generation strategies.
Case Study: A Real-World Financial Turnaround
One of my retail clients was working tirelessly yet making minimal net profit.
Here’s what we uncovered in their financial health check:
Gross margin was 35% (industry benchmark was 50%).
Accounts receivable days averaged 60 (payment terms were 14).
Expenses included software subscriptions they hadn’t used in 6 months.
Actions taken:
Re-negotiated supplier pricing and increased retail prices slightly.
Tightened debtor management with automated payment reminders.
Cancelled unused subscriptions, saving $400/month.
Within four months, their net profit doubled, and they felt far more confident making decisions with data rather than gut feel.
Practical Tips to Implement This Week
Schedule a weekly 30-minute financial check-in in your calendar.
Create your one-page monthly financial dashboard.
Review your accounts receivable list and follow up on overdue invoices today.
Calculate your break-even point if you don’t know it already.
Book a meeting with your accountant or bookkeeper to discuss improving your financial review systems.
My Final Thoughts: Financial Clarity = Business Confidence
Understanding your financials isn’t about becoming an accountant. It’s about having control, confidence, and clarity to make decisions that move your business forward sustainably.
If you’d like help assessing your financial health, identifying hidden leaks or opportunities, and creating an actionable profit improvement plan, consider booking a Business Analysis with me.
Together, we’ll review your numbers, prioritise the right changes, and build a more profitable, stress-free business for you.