A company’s financial performance is the key to mitigating risk and making better business decisions. Unfortunately, the actual measure of a company’s performance seems to be something of a subjective matter, with different businesses using different standards of measurement. One might look strictly at the revenue from operations, while another could look to margin growth rates and operating income.

In the end, there are a few simple steps you can follow to make sure you cover as many aspects of your financial performance as possible. It will require regular checkups on your part, but this kind of proactive approach will help you catch small problems before they destroy the business. You will be able to take corrective actions that will actually solve problems rather than just paste over the cracks.

1.  Determine Liquidity

The first thing you need to look at is the company’s liquidity. This is a comparison of your assets to. your liabilities. It is a measure of you ability to turn your assets into immediate cash for whatever reason. It could be that you need to pay off some bills, or that there is an opportunity in the marketplace for a new product or service, and you have to move fast to secure funding and take advantage of the new development.

Liquidity is usually calculated by the liquidity ratios. This could include your total working capital (your total assets minus the total liabilities) and your current ratio (the total assets divided by the total current liabilities).

It is, generally speaking, much safer to invest in liquid assets than anything else because it will be easier to get some kind of money out of that investment down the road. Even if these assets were not capable of delivering the kind of returns that were expected, they can still be converted into cash and used to cover debts or repurposed for another project.

2.  Measure Solvency

If a company’s solvency is good, chances are their finances are doing fine, too. This is a measure of a company’s ability to pay off all its debts if the assets are sold. In other words, is the company worth as much as it owes? If the answer is yes, then it may be in a position to really start growing.

Solvency is a way to measure a company’s ability to meet long-term fixed expenses and accomplish their goals for growth. It could be viewed as a comparison of borrowed capital to equity capital. There are many different ratios that company could use to determine solvency, including the debt/asset ratio, equity/asset ratio, and the debt/equity ratio.

3.  Understand Profitability

What is the company doing to generate earnings? Where does it currently stand compared to previous years? Profitability can include the ROI on assets and equity as well as the normal profit margins and net income.

In many cases it is easy to look at some profitability ratios and determine whether or not there is more money coming in than there is going out. It’s easy to say that, yes, the company is making money, but you may need to ask whether or not it is making enough money. That is why some companies choose to compare their own profitability against their competition to ensure that they are keeping up with the market and remaining competitive.

4.  Cover Your Debts

The ability to repay all debts and make sure there is cash flow available to meet all the annual interest and principal payments is another very important indicator of a company’s financial performance. The ability to meet all your current obligations is also a strong indicator of your ability to take on new debts for further expansion. It always takes money to make money, and by determining your ability to cover debts, you will know if you are in a position to take on the risks associated with growing the business.

Most companies measure this ability by an accrual net income figure. They can also look at their term debt and capital lease coverage ratio, or consider the capital replacement and term debt repayment margin.

5.  Improve Efficiency

The staff, the management, and all other assets need to be used as efficiently as possible. This doesn’t have to always mean cutbacks and layoffs the moment you think something isn’t performing as well as you had planned. It might mean that there are other ways that you can use your assets more effectively to generate more revenue.

The Tools of the Trade

There is risk to every new venture, and determining the financial performance of the company will help to show that a business has the capacity to assume the risk and meet its obligations. There are a number of financial statements a company can use to complete these five steps, and they usually include the balance sheet (a summary of assets and liabilities), an income statement (the amount of profit at any given time), and a cashflow statement (the sources and uses of revenue).

Just remember, though, these tools are only as useful if they are accurately recorded. Anyone can make the financial performance of a company look good, but it will never survive unless it actually is good. Make use of these documents and include all five steps in your financial so you will be in a position to implement the corrective actions that will keep the company successful.

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