Just How Financially Healthy is Your Small Business, Anyway?

As I grow my business, I have learned that one of the most valuable uses of my time as a small business CEO is to manage the financial health of my business. In other words, is my business strong? Or — heaven forbid — are we skating on such thin ice that one or two bad months could mean the end?

My goal is to have a healthy business that can withstand a few ups and downs (emphasis on the downs) and let me get a good night’s sleep.  That’s my layman’s definition of a financially healthy business.

Monitoring and managing your business’s financial health involves more than simply maintaining a cushion in your bank balance. It’s more than just keeping accurate books. It is more than staying up to date on your accounts payables and not letting your accounts receivables get too stale. Those activities are important, true.

But managing your business for financial health is about taking a big picture view of your business, as interpreted through the detail of your financial statements.  Sound contradictory?  It’s not.

What I am talking about is understanding your financial statements, identifying which numbers matter most on those financial statements, and interpreting those numbers to make informed business decisions. In other words, you are identifying key numerical indicators that tell you how fiscally healthy your business is.

Knowledgeable finance people and savvy business owners call these key indicators “financial ratios.” By monitoring financial ratios, you can benchmark how well your business is doing compared to healthy businesses; watch for early warning signs of ill-health; and develop goals to work toward to improve in any areas of weak financial health.

The Business Owner’s Toolkit says this about financial ratios (also called business ratios):

“In order to assess how your business is doing, you’ll need more than single numbers extracted from the financial statements. Each number has to be viewed in the context of the whole picture.

The true meaning of figures from the financial statements emerges only when they are compared to other figures. Such comparisons are the essence of why business and financial ratios have been developed.

Various ratios can be established from key figures on the financial statements. These ratios are very simple to calculate — sometimes they are simply expressed in the format “x:y,” and other times they are simply one number divided by another, with the answer expressed as a percentage. However, these simple ratios can be a powerful tool because they allow you to immediately grasp the relationship expressed.

When you routinely calculate and record a group of ratios at the end of every accounting period, you can assess the performance of your business over time, and compare your business to others in the same industry or to others of a similar size.”

My frustration with financial ratios is that all too often the explanation and calculations around them are unnecessarily complex and confusing. It took me literally years to decipher financial ratios enough to use them.

Luckily, you don’t need to go through what I went through. I recently found a tool that makes it much simpler for small businesses to assess financial ratios and interpret them.

Small business financial indicators

The Small Business Threat Index is a self-quiz that you take online. Using it you can assess the financial vulnerability of your small business, through using financial ratios.

Professor Jeff Cornwall, Director of the Center for Entrepreneurship at Belmont University, and Dr. George Solomon of George Washington University, have created this useful online tool.

There are 15 questions to the tool, and it should take you 5 to 10 minutes to complete it (assuming you are familiar with your business numbers or can quickly pull up your financial statements to look at them).

I urge you to take the quiz. If the questions seem daunting or complex, don’t give up.  Just break down the questions, and you will soon work your way through them. It’s worth the time and effort.  Taking the quiz will help you understand your business and be a better manager of your business’s fiscal health.

Editor’s Note:  This post was originally published at the OPEN Forum.  There you can find more helpful information for financial management of your business — check it out to keep your business healthy.


Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

12 Reactions
  1. RedHotFranchises

    Overcoming these challenges will help every Business Owner to evolve. I would certainly recommend taking this quiz. Thanks for the wonderful insight.

  2. This is very good information for us small businesses. Like many things we should be doing regularly, the lack of the resources to provide a sanity check on our numbers seems to be a challenge.

    Great info – hopefully these numbers will be turned into some trends and posted.


  3. Thank you for the reminder as we consider hiring more Virtual Assistants. Couldn’t agree more with considering the “big picture” health of the business. This post is very well written, thank you.

  4. Martin Lindeskog


    Jeff Cornwall has done a great job with the The Small Business Threat Index. We discussed that “cash is king” (cash flow and the difference between outgoing and incoming invoices) over at Open Forum.

    Would you say that factoring could be one of the solutions? As I said before, I think you should foster a dialogue between the sales people and the purchasers regarding the status of the terms of payment. Then have a talk together with finance department you could easy see if you have a mismatch between outgoing and ingoing invoices.

  5. From the small retail owners that I frequently consult with, I agree that a more thorough knowledge of financial statements and financial ratios would put many on a much more solid footing. If nothing else, maintaing a larger cash cushion at all times would provide much greater liquidity to get through tough times like we’re in now.

  6. Thank you for this post and educating business owners on the need to be financially intelligent. Dashboards or flash reports are a good way to stay on top of a company’s financial information.
    Susan Hammond

  7. I’ve read this at openforum. Tried the tool and it’s cool.

    We just always have to remember that “Cash is King!”

  8. Anita,
    While I agree with you that cash is king, I would argue the quality of cash is king. We often find that when we start working with our clients they have relied on cash flow from loans and lines of credit to keep operations going. For many, they monitored only their bank account and sales number. When the easy money that covered up so many other issues evaporated– they finally see that their core business operations weren’t generating cash and realize they are in a pinch. The tool above helps identify some of these issues. Ideally, a bulk of your cash flow should be from your operations, not from your personal bank accounts or your lenders, unless you are in a very capital-intensive business or growing rapidly. If you aren’t a “numbers” person it probably would be beneficial to work with your accountant or business advisor or CFO to do a reality check on your financials. It could provide the course correction you need to avoid future financial disasters.


  9. I got a very good tool for Industry Metrics. Whether you are researching the industry of your client or investment target, or investigating best practices of financial management among your company’s industry peers, Fintel.us Industry Metrics (FIM) reports are for you. They offer unique and powerful insights into the financial profiles and performance of privately-held companies operating across almost all industries.

  10. Accounting and financial management have often been regarded as the most complex aspects of managing a business. The numbers are usually big, the formulae confusing and there are so many regulations. It is fine for the Director of Finance/CFO and his/her team but what about the other stakeholders, especially average investors and the managers actually running the show. How can they ensure that their investment is safe or their performance is in line with organizational goals?