3 Early Signs Your Company is Going Under
How to look out for early signs of your business going under? We give you list of metrics to watch out for.
As a business owner, the responsibility of assessing if your company could face a financial crunch or, worse, go under always rests on your shoulders. This often requires you to watch your company’s balance sheet and ensure you don’t burn cash fast.
For instance, if your company is burning through cash fast because you are investing somewhere, it could mean you are investing for future gains. But if your cash flow statement shows that your company is burning cash in its operating activities, it’s a cause for concern.
What are some financial metrics that could point to your company going under? Are there any trends you can observe that can nudge you to improve your cash management in advance to prevent this?
Below are three metrics you can track that are early warning signs of your company’s financial health.
Asset to Liability Ratio
The first important sign to look out for is your Asset to Liability ratio. The value of this ratio shows whether your company is able to pay off all of its debt. In comparison, a higher ratio means the current assets are greater than the debt.
But that does not mean that the ratio with the highest difference means the best case scenario. If the difference in the ratio is very large, it could also indicate that the company does not use current assets optimally for resource development.
Debt to Equity Ratio
The second tip for measuring a company’s financial health is to look at its debt-to-equity ratio. The ratio shows whether the company has too much debt to run its business, compared to using an injection of investment funds from shareholders, investors, or creditors.
The higher this ratio, the more likely it is that there will be debt repayment problems in the short and long term at your company.
This ratio can also be easily used as a measuring tool for potential lenders or investors, to determine the level of risk of extending credit or investing in your company. The higher the ratio, of course, the higher the risk.
Asset Turnover Ratio
The next ratio is your company’s Asset Turnover Ratio, which describes how quickly and efficiently you generate income from the assets you have in the company. This can apply both to trading companies and property companies, which you can discuss further with your accounting consultant.
The higher the ratio, the faster your assets generate money. The lower the ratio, there can be several possibilities, either a production problem or a problem with your product management.
Each industry has a different benchmark for the Asset Turnover ratio. Therefore, the best way is to compare it with similar industries. This can be assisted by Bunker Books, through the Business Report Business Review.
Bunker Books helps streamline your bookkeeping and provide comprehensive financial reports by providing strategic insights to fuel your company’s growth.
Never underestimate the power of an accurate balance sheet. It is very important to know your company’s monthly balance sheet position to avoid pitfalls and proactively take calculative steps to seize business opportunities for your business’s growth and success.
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