Financial Health of business

How to find financial health of business?

There are few factors to consider about financial health of business.

Many a times, P&L shows huge profits, but real cash flow is not visible, this leads to closure of many businesses due to creditors and banks knocking the door.

Price and sales - Pricing is key, how much gross profit is earned for each unit and growth of sales each period.

Inventory - The inventory should not be stagnant, it should circulate, old stock should go out and new stock should come in and the speed at which stock circulate is important. Faster the circulation compared to prior period, it is good.

Debtors - How much receivables lying with debtors? if it increases each period, it is not a good sign. Similar to inventory, old receivables money should flow in and new should add. Faster the realization, good for business.

Revenue generating assets - Business assets should include revenue generating assets only, if it has non-revenue generating assets, it is not good for business. Non-revenue generating assets should be sold so that it can be used or deployed in good assets that can generate revenue.

Debt - Debt is good for business few times, but not all the times. If the return of capital employed is minimum 2 times the interest of debt, it is good. Example: if Return of capital employed is 20% and interest is 10%, it is good. But, this is good only when interest rates are in declining or stagnant, if the interest rates are rising, be careful, it can make your business non-profitable in no time.