Small business owners sometimes neglect to keep a watchful eye on their business accounts. After all, there is a lot to do when you are running your own business. Even so, it is advisable to carry out a financial health check occasionally to ensure that your small business is healthy and on track.  Here is an eight-point checklist that you can use to quickly assess the health of your small business.

Positive Cash Flow

This one is pretty simple.  How does the bank account look?  Occasional cash flow shortages are inevitable in any small business. A significant invoice can become due when cash reserves are low or a customer may catch you out by being late settling their account. However, if you are constantly experiencing cash flow difficulties, your business may not be as healthy as you think.

One sure fire way to test to see if your business is in trouble is to look at your personal credit cards, bank account and savings.  If your personal debts are going up and your cash accounts are going down, look closely at these to see if the company shortfall is drawing on your personal resources.  If you are constantly putting more money into the company bank account to keep everything afloat, then you definitely have an issue.

New Customers

Another easy test is to ask yourself is whether your business is attracting new customers.  All business will lose customers for various reasons.  However, if you are still continuing to attract new clients and customers, then there is a pretty good chance that your business is doing OK.

Do You Owe GST

Another quick test frequent GST filers can do is to see if they owe GST.  This test is especially true of businesses that do not have many employees.  Owing GST means that your sales are higher than your expenses so you are probably being profitable.  The larger the amount owed, the more likely it is that you are making a profit.  This test does not work for all companies but is pretty good if you do not deal with foreign sales or zero-rated items.

Healthy Profit Margins.

If you are keeping track of your business by maintaining the accounting, then there are two profit margins that you need to be tracking. The first is the gross margin, which is sales less cost of goods sold, and the second is net profit, which is the total profit less your overheads. If your business is healthy, both these financial indicators will be constant or improving and broadly in line with similar companies.

What constitutes a healthy profit margin will depend on the sector in which you operate. In very general terms, a profit margin of 40% or higher is considered good.  Profit margins of less than 10% are considered bad.  This test can be helpful in deciding whether you have a business that will survive.

Expenses Are Under Control

In most business, expenses will remain pretty constant no matter what the sales do.  With the exception of the cost of goods sold and the direct labor costs, most expenses should remain pretty much the same from year to year.  If you are experiencing wild fluctuations in your expenses from period to period, you need to investigate the offending accounts closely.

There will be times that overheads leap up. If you move to larger business premises, for example, the rent will increase. Taking on new employees will step up expenses, too. However, these changes should be readily explainable by the business owner or managers. If not, then there is an issue that needs to be reviewed.

Healthy Mix of Repeat and New Business

Customers come and go in any business. But if you have a steady stream of both new and repeat business, you will be able to weather changes to your customer base. A combination of the two types of sales is a good indication that the company is sustainable and capable of growth.

Acceptable Accounts Receivable Turnover

This particular area is often hard for new business people to understand.  In short, you need to manage the amount of money that your customers owe you.  If you don’t, then your bank account will continue to drop and will put your business at risk.  So, it is important to keep on top of the accounts receivable.

The accounts receivable (A/R) turnover ratio indicates how fast your credit customers are paying you.  The A/R turnover ratio is calculated by dividing the average total A/R balance by the total credit sales for a given period. The result of that calculation is the number of times the A/R balance was collected. The A/R turnover multiplied by the number of days in the period will yield the average number of days it takes customers to pay their accounts.

The higher the A/R turnover, the better. If the average days to collect significantly exceeds what you think is reasonable, then you may need to start calling customers and sending out statements. 

High Inventory Turnover

Another good test is to consider is how much inventory you have on hand and how often you have to reorder.  The inventory turnover ratio shows you how frequently your stock is used and replenished. The figure is calculated by dividing the cost of goods sold by the average inventory over a period. A high inventory turnover is healthy because you don’t have too much cash tied up in stock. If inventory turnover is low, though, you might need to review what you hold in stock and your purchasing cycles. Don’t be afraid to sell off slow-moving items at cost or a loss in order to free up cash for your bank account.  Those slow-moving items can become dead weight to an otherwise healthy business.


Small business owners will usually have a good idea of how their companies are performing. After all, it’s hard not to notice that you don’t have sufficient cash to pay the creditors. Even so, problems can creep up on you when you are extremely busy. So, it is still advisable to do your accounting on a monthly basis and review your business accounts each month.