How to give your start-up a financial health check

A healthy business is a successful business, and if you want to build a strong foundation for your start-up, it could be a good idea to regularly review its financial well-being.

A financial health check helps you identify trends and make long-term strategic decisions.

This guide explains how to get started and provides tips to improve your start-up’s financial health.

How to assess your start-up’s financial health

A financial health assessment is a way of measuring your organisation’s cash reserves, revenue, and performance.

There are several key performance indicators you can use to perform these checks.

Here are six financial areas to keep tabs on as you grow your start-up.

1. Working capital

Working capital refers to an organisation’s available funds to cover its day-to-day operational expenses.

Start-ups can calculate their working capital by subtracting their current liabilities from their assets.

Working capital can be either a positive figure (the business is making more money than it’s spending) or negative (it’s spending more than it’s making).

By calculating your working capital, you will know how much money you have on hand to meet your immediate operational costs.

A healthy working capital means you can sustain tricky financial periods without worrying about upcoming bills.

2. Revenue

Revenue refers to the money a business makes from selling its products or services.

By assessing your revenue, you’re asking whether customers are buying your goods or services.

You might need to rethink your approach if certain products or services are not performing well.

Lowering your price might make people more inclined to use your business, but you’ll make less money from each transaction – and the opposite can be true of increasing your prices.

Revenue can be measured daily, weekly, or monthly.

It can also be assessed in terms of units sold or money made from those sales.

3. Burn rate

Burn rate refers to the speed at which a business spends its available capital, usually calculated in monthly expenditure.

Start-ups can use burn rates to forecast their long-term viability.

This allows you to see how quickly your start-up is spending cash and determine how long your available capital will last.

By keeping track of your burn rate, start-ups can better plan for the future, such as when to think about seeking more funding or if you need to cut costs.

4. Cash flow

Cash flow is the amount of money coming into and out of your business.

These flows will rarely be consistent because almost all start-ups have wages, rent, or inventory expenses that can fluctuate.

Although you will always want a positive cash flow – with more money coming in than going out – this isn’t always possible.

But, by monitoring this data, you will be in a better position to navigate periods of fluctuating cash flows and ensure that you have a healthy balance of incomings and outgoings.

Read our guide on how to manage and protect cash flow during difficult times.

5. Profit margins

Your profit margin is the percentage of money you earn for each sale after other costs have been accounted for.

This figure helps ensure that your goods and services are profitable.

If the production or delivery costs exceed the amount you charge, you’ll lose money on each transaction.

The profit margin also needs to be large enough that you have enough money to cover operational expenses and generate a profit that will allow your start-up to grow.

You could improve your profit margin by spending less on production or delivery costs or, alternatively, you could charge more for your goods or services.

Learn more about profit margins.

6. Customer satisfaction

Customer satisfaction measurements help you understand how consumers interact with your business.

One way to measure customer satisfaction is by checking online reviews and social media posts.

You might also ask them for feedback directly, using the NPS (Net Promoter Score) to turn their thoughts into quantifiable data.

These assessments are a great way to predict your start-up’s long-term success.

Satisfied customers are likely to bring repeat business and might even recommend you to their friends, co-workers, or online followers.

Start-ups could also use feedback to identify problems with their products or services.

Read our guide on how to measure customer satisfaction.

Steps to take to improve your start-up’s financial health

Now that you have some ideas about how to begin assessing your start-up’s finances, you might want to look at ways to improve its health.

Here are a few things you might consider.

• build an emergency fund – it can be reassuring to have some cash reserves to cover essential costs, including payroll and supplies, in case of emergencies. This reserve acts as a financial safety net, providing peace of mind and stability during unexpected situations.
• use tax benefits – your start-up might be eligible for tax deductions related to your business expenses, such as equipment. Taking advantage of these deductions could reduce your overall tax liability, giving you more resources to invest in your start-up.
• streamline expenditure – a diligent approach to cost management could enhance financial stability, allowing resources to flow where they are most needed. You might start by negotiating supplier contracts or reviewing your purchasing habits, but there are plenty of other ways your start-up can cut costs.
• diversify your income – by discovering additional channels to earn revenue, you can become more flexible and improve financial stability. Some start-ups might be able to white-label their products or provide coaching and consulting services, but there are plenty of other ways to generate additional income sources.

Incorporating these financial strategies into your start-up’s approach could significantly bolster its fiscal well-being.