Running a business in Thailand without conducting financial health checks is reckless and you are risking going bankrupt. You think you are moving forward but you cannot see the obstacles ahead of you.
There are numerous challenges that the business environment presents, so it’s a great idea to perform a financial health check of your company to ensure survival and sustainable growth.
Why the Need?
Every year, thousands of businesses fail not because they lack good products or services, but because they lose control of their finances. A promising enterprise may quickly struggle with the presence of cash flow problems, mounting debt, and declining profitability.
When you do financial health checks, you can identify the root cause of your financial concerns before they become too big to deal with.
Consider this example below. A mid-sized manufacturing company in Bangkok that seemed profitable on paper, but its reality? It is struggling with cash flow. When it conducted a business financial health check, they found that even if their profit margins looked fine, their accounts receivable had ballooned to dangerous levels. Thanks to this, they were able to tighten credit policies and avoid a potential cash crisis.
Gathering and Organising Your Documentation
Your financial health check begins with three documents.
- Income Statement
The income statement reveals your profitability over a period (like monthly, quarterly, or annually). When you are reviewing your income statement, look beyond the bottom line to understand the story your numbers tell.
Revenue recognition should follow consistent patterns unless you’ve made strategic changes to your business model. Cost of goods sold should maintain reasonable relationships to revenue, with gross profit margins staying within expected ranges for your industry.
Operating expenses are often the most controllable element of your financial performance. So scrutinize. Are admin costs growing faster than revenue? Are marketing expenses generating proportionate returns? And so on.
- Balance Sheet Components
Your balance sheet provides a snapshot of your business’s financial position at a specific point in time, showing what you own, what you owe, and your net worth.
Perform both asset analysis and liability assessment. The former should focus on composition and quality while the latter must involve timing and terms.
- Cash Flow Statement Analysis
The cash flow statement bridges the gap between profitability and liquidity, showing how cash moves through your business. When you analyse this, it shows problems that you do not see in profit and loss statements.
Operating cash flow shows whether your core business activities generate positive cash flow. Businesses can be profitable on paper while they’re struggling with cash flow. So properly assess if you have a positive or negative operating cash flow. A positive one indicates that your business model generates cash rather than consumes it.
Healthy businesses also show periodic investment in productive assets. So also take a look at your financing activities as it will reveal how you manage debt and equity, including loan repayments, dividend distributions, and capital contributions.
Financial Ratio Analysis
Profitability ratios measure how effectively your business generates profits from its operations, assets and equity.
Gross profit margin, calculated as gross profit divided by revenue, measures how efficiently you convert raw materials and direct labour into profitable sales. This ratio should remain relatively stable unless you have made changes to your product mix, pricing strategy, or cost structure.
Net profit margin, calculated as net profit divided by revenue, reflects your overall profitability after all expenses. This ratio considers your production efficiency and your ability to control operating expenses and manage financing costs.
Return on assets (ROA), calculated as net profit divided by total assets, measures how well you use your assets to generate profit. This ratio helps evaluate the effectiveness of management and resource allocation decisions.
Return on equity (ROE), calculated as net profit divided by shareholders’ equity, shows how much profit you generate for each dollar of owner investment. This ratio is important for evaluating business performance from an ownership perspective and comparing investment alternatives.
Monitor Liquidity and Solvency Too
For short-term financial health, you have to evaluate three liquidity ratios: the current ratio, quick ratio, and cash ratio.
A current ratio above 1.0 indicates that current assets exceed current liabilities, but the optimal ratio depends on your industry and business model. A ratio that is too high might indicate that you are utilising assets inefficiently.
Quick ratio, calculated as quick assets (current assets minus inventory) divided by current liabilities, provides a more conservative liquidity measure by excluding inventory. This ratio is important for your business if it has significant inventory levels or seasonal sales patterns.
Cash ratio, calculated as cash and cash equivalents divided by current liabilities, represents the most conservative liquidity measure. This ratio shows what portion of current liabilities you could pay immediately with available cash.
For long-term financial stability, you can also use three financial ratios: the debt-to-equity ratio, debt service coverage ratio, and interest coverage ratio.
| Debt-to-equity ratio |
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| Debt service coverage ratio |
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| Interest coverage ratio |
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Cash Flow Health Assessment
Cash flow represents the lifeblood of your business. You can be profitable on paper but still fail if you cannot pay your bills. You will need a thorough cash flow assessment to know your ability to sustain operations, invest in growth, and weather unexpected challenges.
Operating cash flow measures the cash generated by your core business activities, except financing and investment activities. Your operating cash flow should generally be positive and growing over time. However, if you have a negative operating cash flow, it may be acceptable if your business is experiencing rapid growth. Otherwise, having chronic negative operating cash flow only means that there are business model problems you need to take a look into.
You should also assess your revenue to cash conversion efficiency. This measures how quickly and completely your sales translate into cash receipts. Businesses with high conversion efficiency collect cash quickly and experience ‘only minimal’ bad debt losses.
Debt Management and Credit Analysis
Debt can be a powerful tool for growth but it can also become a burden that constrains operations and even put your business at risk. Good debt management will go a long way.
Look at everything you owe. Look past the amount. See the payment terms, timing and the reason why you borrowed the money in the first place.
Compare your debt’s interest rates to the market. For fixed rates, payments stay the same but can cost more if rates drop. For variable rates, payments may go down when rates drop but can increase if the rates rise.
Your debt repayment plan should match your cash flow. Have a seasonal business? Flexible payment options could be your best choice. Growing businesses may choose payments that increase over time.
Also check regularly if you can refinance loans to lower costs or get better terms. Do not only consider the interest rates but also the fees and conditions attached to loans.
Next is to strengthen your accounts receivable. Have clear policies for giving credit; set credit limits and payment terms to balance sales and risk.
Expect that some customers won’t be able to pay (on time or ever). Use realistic estimates so your profit reports are accurate. In short, always stay on top of customer payments and credit terms.
Conclusion
Performing business financial health checks is not something you have to achieve or arrive at. It’s a continuous process to determine the current and future financial health of your company.
Start with the basics and build capabilities over time. As you continually focus on your business’s financial health, you will notice differences in performance and long-term objectives while having the flexibility to adapt to changing market conditions.
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