It also helps extract essential information required to spot potential trends, opportunities and weaknesses, all of which are crucial for the continuous development of your startup.

A financial health check is essentially an MOT of a business to ensure company finances are watertight. If the checks prove otherwise, it can highlight areas that require improvement, and where these efforts can be best targeted. While a startup can rapidly reach financial success, patience and perseverance are paramount when planting the roots of your business and finding your footing.

What is a financial health check?

A financial health check is a review of your startup’s finances. This includes assessing a range of areas, such as:

Cash flow – Cash flow is the flow of cash that enters and leaves the business, also known as income and expenditure. Positive cash flow is when there’s more cash entering the business and negative cash flow is when there’s more cash leaving the business. If your startup has positive cash flow, this is advantageous as your startup is less likely to run out of cash as there’s healthy turnover.

Debts – How much does your business owe to creditors? This includes any sort of borrowing, such as mortgages, rent payments, business loans and credit lines. If company debts outweigh assets, this means that your startup runs the risk of owing more than it is due.

Assets – What’s the value of company assets? Things owned by the business that hold value are classed as assets, such as tangible and intangible assets. Tangible assets are physical, such as property, equipment, machinery, and stock, and intangible assets are not physical, such as intellectual property, licenses and goodwill.

Sales forecast and budget – What’s the value of sales generated by your startup in the last period? This information helps set an accurate budget and forecast sales and expenditure. You’ll also be able to spot sales trends, such as busy periods, demand specific to a particular industry and how diversified your client base is.

Credit control and debt collection – This is an opportune time to review the stringency of your credit control and debt collection system and its effectiveness. If your startup has racked up bad debts, it may be time to tighten your credit control methods.

Credit score – Your startup’s credit score reflects on your spending habits and borrowing behaviour and contributes to affordability checks when applying for business finance. A strong credit score can give you access to competitive finance rates as there’s less financial risk.

If your startup is in poor financial health, what are your options?

What if my business is in poor financial health?

If your startup is in poor health, pinpoint the areas that require attention and devise a plan of action. You may seek professional support from an accountant, mentor, or financial advisor, or try it yourself.

Reduce expenditure – If you spend more than you earn, reduce your outgoings and degrade the services you pay for, if possible. Cost cutting is essential if your business is in financial distress that’s unlikely to subside.

Regularly review borrowing – If your startup relies on finance, check that you’re on competitive terms regularly to make sure you’re not paying more than you need to.

Generate supplementary income – If you can offer additional service lines to complement your core offering, you can use this supplementary income stream to cover company expenses.

Realise assets – If your startup is in serious debt and requires an urgent cash injection to save it from becoming insolvent, you may consider offloading company assets to raise cash.

Gear up credit control – If your startup accumulates bad debt, you may gear up your credit control to encourage debtors to pay up by implementing new follow-up methods, such as, automated reminders issued through your accounting system, or tighter payment terms.

Improve credit score – If you have a low credit score, your financial health check can encourage you to make active changes to remedy this, such as making timely payments or relying on alternative sources of finances, if available. If your startup is newly established, it can take some time to build a strong credit score as your spending history will be limited.

How can a financial health check help your business?

A financial health check is essential to the smooth running of any business as it reviews performance, examines the business for weak spots and contributes towards a roadmap for the future. It helps you take an informed approach when devising a business plan, as you have established how much you earn, save and spend.