Understanding every aspect of your business not only ensures that you are in control of your business but also enables you to forecast and prepare it for the future. Tradies that are hands on usually focus on getting the actual work done, however, the financial side of the business needs equal attention.
Playing the leadership role in your business requires investing time in the different functional areas of the business, be it finance, marketing or business development. However, as the business grows, this can potentially become overwhelming for one person creating the need for extra human resources to help.
One of the key functions of any business owner is to know and understand the business’s financial performance. After all, this is one of the major reasons why people create their businesses, to make profits. Analysing the financial health of your business will help you make informed business decisions for example, whether you will be able to get a loan, whether you can pay your employees or even decide how you will pay for a new vehicle.
We have listed ways you can check your trade business health:
Use financial ratios
These are some of the ratios that can be used to analyse the financial health of your trade business and as an owner, understanding these ratios gives you a clearer picture of whether your business is financially healthy or not.
Liquidity: Current assets ÷ current liabilities. Also known the current ratio, it measures whether the business has enough current assets to meet its due debts.
Solvency: Total liabilities ÷ Total Assets. These ratios show the extent to which the business can meet all its debt obligations from sources other than cash flow.
Profitability: Gross Profit ÷ Total Sales. Profitability ratios measure your business performance and success of your business operations.
Return on investment: Net profit before tax x 100 ÷ equity. This ratio measures whether there has been a positive return on the equity.
A professional accountant can help you calculate these ratios and explain the implications of the results on your business given the industry trends. At Tradies Accountant, we help Tradies set strategies focused on business success and assist them by providing forecasting advice, cash flow analysis, cost reductions, price improvements and the analysis of group company structure.
Benchmarks can be used in analysing market trends, for comparing the company’s performance to that of its competitors and, in some cases, for even predicting what will happen in the future.
Financial consultants can help you with your planning, budgeting and forecasting, allowing you to make informed decisions about your business and having periodic reviews can help ensure that you understand your current position and to take measures to rectify any variance.
We specialise in providing bookkeeping, accounting and business building services to trade business owners. Contact us for a free initial consultation.