Jacob Montano

Jacob Montano

It’s well known that during an annual health exam, your doctor can help identify areas that need attention so they won’t become bigger issues later on. The same principle applies to your business. By proactively addressing financial issues, you can help keep your business strong and prepared for the future.

When conducting a financial checkup for your business, consider the following five steps:

1. Assess the business environment and immediate business needs

The business environment has changed dramatically in the last two years. This is a good time to assess any changes that took place in your business, such as any newly implemented business models or goods and services. Evaluating these impacts to your business will help you identify immediate needs that must be addressed.

2. Take a deep dive into your financial KPIs

Your financial key performance indicators, or KPIs, can tell you a lot about the health of your company. Your CFO or accountant may be able to provide a report of relevant KPIs that should be referenced not only during your financial checkup, but throughout the year.

These KPIs may include:

  • Budget variance: Instances where your actual costs deviate from the costs you budgeted for.
  • Gross profit margin: The percentage of sales revenue your company keeps after covering the direct costs of running your business.
  • Operating cash flow: The cash generated by your normal business operations. This takes into consideration non-cash expenses like depreciation and amortization and items such as inventory changes, accounts receivable and accounts payable to reveal your adjusted net income.

Understanding your KPIs will help you identify potential inefficiencies in your business and look for ways to improve your company’s operations.

3. Consider opportunities and threats for your business

If your company is sitting on extra cash — perhaps because you’ve exceeded projections or because you won a pitch competition at Boise Entrepreneur Week — you might want to ask yourself: What is the best way to leverage these funds? If business is booming, you may want to increase your marketing budget, hire new employees or make strategic investments to grow your business.

Conversely, it’s also important to anticipate future threats to your business. If you anticipate being negatively affected by supply chain constraints or tightened consumer spending, this might be a good time to build an emergency cash reserve or pay off debt.

4. Forecast cash flow and identify financing options to overcome any gaps

Understanding future threats and opportunities will help you develop a cash flow forecast, which outlines how your company’s money circulates in and out during a specific time period. If your forecast indicates you may need additional cash, be proactive in discussing those requirements with your banker.

You might benefit from applying for a U.S. Small Business Administration loan — which provides special benefits for small businesses — or from applying for a business line of credit. Remember, an accurate forecast will help your company better prepare for any tight cash flow periods and stay resilient in the face of adversity.

5. Adjust your budget

After completing your cash flow analysis, you can align your budget to match your current situation. This process may include readjusting your spending, increasing your prices or making investments to boost your conversion rate. For example, some businesses that anticipate being negatively affected by the delta variant of the novel coronavirus are reducing production costs or leveraging lower-cost marketing options.

As you go through these steps, remember that you don’t have to do it alone. A skilled banker can bring fresh eyes to your company’s processes and help identify ways to increase profitability. Being proactive with the financial health of your business can help position you for success.

Jacob Montano is a Community Banking relationship manager based at the Burley branch of Zions Bank, a division of Zions Bancorporation, N.A. Member FDIC. He can be reached at 208-572-3293 or jacob.montano@zionsbank.com.