Change Gears - Step 2 - Check your financial fitness

Time to crunch the numbers!

Before diving into a major transformation, it’s crucial to know if your business is financially ready and stable. Remember, growth and change come with their own costs. This step helps you assess your current financial health, ensuring you're in a strong position to manage the transition.

Let's break it down.

Create a summary of financial performance

Creating a summary of financial performance is not just about crunching numbers; it's about telling the story of your business’s financial journey. This summary should serve as a critical tool for decision-making, helping stakeholders understand where the business stands and where it is heading.

Collect financial statements
Gather the key documents:

• Income statement: Shows your revenue, expenses, and profit or loss.
• Balance sheet: Provides a snapshot of your assets, liabilities, and equity.
• Cash flow statement: Details cash inflows and outflows.
  
  

Analyse key financial metrics
Look at important numbers like:

• • Revenue: Total income generated from business operations.
  • Net profit margin: Profit as a percentage of revenue.
  • Gross profit margin: Revenue minus the cost of goods sold.
  • Operating cash flow: Cash generated from regular business activities..
  • Liquidity Ratios: For example, the Current Ratio shows your ability to pay short-term liabilities with short-term assets.
  • Debt-to-equity ratio: Indicates how much of your business is financed by debt versus equity.
    
    

Highlight trends and changes
Note significant trends like:

• • Year-over-rear (YoY) growth: How metrics like revenue and net profit have grown or declined compared to the previous period.
  • Quarter-over-quarter (QoQ) changes: Similar to YoY but for consecutive quarters, to identify more immediate trends
    
    

Provide contextual analysis
Explain what’s behind the numbers:

• • Operational achievements: New products, market expansion, or efficiency improvements.
  • Market conditions: Economic impacts, competition, and regulatory changes.
  • Future outlook: Challenges and opportunities ahead.
    
    

Summarise key points
Capture the essence:

• Overall financial health of the business.
• Key achievements and challenges.
• Strategic actions planned or taken in response to the financial analysis.
  
  

Visual representation
Use charts and graphs to make the data easy to understand, especially for those without a financial background.

Review and update regularly
Keep your financial summary current, updating it quarterly or annually to track progress and stay informed.

Evaluate your debt levels and repayment capabilities

Understanding your financial position is crucial for making smart decisions as you pivot your business. By analysing your financial health and debt management, you ensure your business is ready to face new challenges and seize opportunities.

• List all debts
  Detail all your debts, including loans and credit cards. Note the total amount owed, interest rates, monthly payments, and due dates.
• Calculate total monthly payments
  Sum up all your monthly debt payments to understand your total debt obligation.
• Assess cash flow
  Subtract your total expenses (including debt payments) from your income to see if you have a positive cash flow.
• Debt-to-income ratio (DTI)
  Calculate your debt-to-income ratio by dividing your total monthly debt payments by your gross monthly income. This ratio provides a percentage that lenders often use to assess your borrowing risk. A DTI ratio below 36% is generally considered favourable, but this can vary depending on the lender and type of loan.
• Analyse repayment terms
  Look at each debt's repayment period and interest rates. Consider options like refinancing or consolidation to manage payments better.
• Evaluate repayment strategies
  Choose a strategy that suits your situation, like the debt snowball (smallest debt first) or debt avalanche (highest interest rate first).
• Emergency fund and savings
  Ensure you have a safety net for unexpected expenses, ideally covering 3-6 months of expenses.
• Seek professional advice
  If managing debt is challenging, consult a financial advisor for personalized guidance.
• Monitoring and adjustment
  Regularly review your debt situation and adjust your plan as needed.

ACTION

Check your financial fitness

Download and complete the Financial Fitness Template to help you decide how to align your financial resources with your chosen path forward.