Mid-Year Financial Checkup: Assessing Your Small Business's Financial Health 1

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With all the hard work that goes into running a small business, another six months of successful operation is an achievement in itself! However, the mid-year point is also a perfect opportunity for a financial wellness check to look at where you excelled, where you struggled, and where you’re going next.

Moreover, the process can be relatively painless. Any small business with modern invoice software should have access to most of the necessary data. Ahead, we’ll discuss the basics of what data to look at, which metrics to use, and what they can tell you about the financial state of your business.

Key financial documents for SMBs

To get started, you’ll need to assemble the core financial documents that will give you a picture of your small business’s health. For most companies, this will include three primary documents, which any SMB accounting software will allow you to pull quickly and easily:

  • Balance Sheet: The master document that lists a company’s assets, liabilities, and the difference between them (known as equity). Your balance sheet represents a complete at-a-glance snapshot of your business’s current financial position.
  • Cash Flow Statement: A document that tracks your business’s cash inflow and outflow within a given period, including revenue and expenses. Cash flow statements don’t track long-term expenses like depreciation and amortization, only short-term cash flow items like accounts payable and receivable.
  • Income Statements: Statements that document your business’s assets and liabilities over a certain period of time. Unlike cash flow statements, income statements do track non-cash items such as depreciation and unrealized gains or losses, making them essential for monitoring small business health and performance in the long term.

Five indicators for mid-year performance

Although all kinds of indicators can factor into a complete picture of your business’s health, these are the most vital high-level metrics for most SMB operators:

  1. Revenue and Sales: The amount of money your business brings in before expenses and which of your products and services drive that revenue.
  2. Costs and Expenses: The amount of cash your business requires to pay its bills, from rent to payroll to product to office supplies.
  3. Liquidity and Solvency: The amount of liquid capital (usually cash) that your business has on hand from month to month and its ability to pay its expenses.
  4. Debt and Leverage: How much debt your business is carrying from loans, credit cards, financing, crowdfunding or other sources of leverage.
  5. Profitability and Margins: Last but not least, all of the previous factors will determine your business’s profit margins. While even successful firms may not be profitable all the time (especially at first), profit margins are vitally important to monitor as an overall indicator of business health.

Pay attention to time periods when examining these indicators. Year-to-date performance is typically the standard view for a mid-year financial checkup. However, it’s also a good idea to look at year-over-year numbers, or numbers from an even longer period if they’re available, to help form a general idea of a business’s trajectory.

How to identify areas for improvement

No matter how well your business is doing, there’s almost certainly at least one area where you’d like to improve performance. Sometimes that area will be apparent at first glance, while in other cases, you’ll need to carefully examine the data to find the story.

  • Competitive Analysis: Find benchmarks for your industry and compare your business’s KPIs. These data are often available from government sources or through third-party research organizations. While comparison with other companies isn’t the be-all, end-all of financial health, benchmarking will give you a good idea of where you stand in the market.
  • Financial Red Flags: Look for potential trouble spots like excessively high costs, thin cash flows, high debt-to-equity ratios, or unprofitable products and services. Prioritize clear and open communication with your team about these issues and make a plan to address them.
  • Resource Allocation: Some areas of the business may need more resources allocated, while some may need less. Aligning your business’s goals and needs with its expenditures is a fundamental part of a financial checkup.

Making adjustments

Sometimes, your financial checkup will tell you your business is right on track. Other times, you’ll need to make targeted changes to your business practices to stay on a profitable path. Some of the most common adjustments after a financial checkup might include:

  • Goal Setting: Do your financial goals from earlier in the year still make sense? It might be time to make adjustments such as raising or lowering revenue targets, cutting costs, or even pivoting to a new business strategy.
  • Financial Controls: If you’ve found that you’re not tracking important data, it might be time to implement new financial controls, such as switching to a more robust receipt and expense tracker system.
  • Revenue Streams: Some businesses supplement their income by developing new revenue streams such as selling their manufacturing waste products, renting out unused space, licensing their brand, or any number of other options.
  • New Financing: If your business is ready to grow but needs more capital, it might be time to seek out additional financing. Many different options are available, from traditional small business loans to business credit cards to crowdfunding.
  • Cost Reduction: Your costs might not be sustainable for your current business environment, in which case you’ll need a smart plan for cost reduction. This can mean renegotiating contracts, refinancing debt, looking for new insurance providers, or even making the tough decision to reduce your payroll.
  • New Hiring: On the other hand, a lack of labor might be hurting your bottom line if (for example) you’ve turned down new business opportunities because of it. Look for skills gaps in your workforce and ask yourself what kind of talent is necessary to close them.

With unpredictable economic conditions and competition that’s as fierce as ever, it’s never been more important for SMBs to track and understand their financial data. Get in the habit of performing a mid-year checkup via your small business accounting software, and you’ll often find that you have more clarity and visibility on your financial data year-round.