Financial Health Monitoring – What Is It And Why Is It Important?

Clients are one of the most critical parts of your business – arguably the most important! After all, without them your business wouldn’t exist! So it’s no surprise that a lot of businesses look after their clients as though they were a child. They keep a close eye on them, taking care of them and making sure everything is going to plan. One of the ways you can do this is by monitoring their financial health. This not only helps ease your mind that your customers are doing well, but it can also provide valuable insights on potential clients and how they might influence your cash flow.

What Is Financial Health Monitoring?

There are a number of things that make a company tick, but their financial health is one of the biggest factors. It’s like the life force of the company, and what keeps successful companies year after year. A company in good health will be turning over a good profit each year and be free from massive debts or other operating issues. They’ll have a steady cash flow with no big peaks and troughs, no outstanding debts they haven’t paid, no legal actions, and be actively turning a profit year on year. It’s the foundations that make the rest of the business flourish.

A business in bad financial health however, won’t look so good. There will usually be outstanding debts, they may have been flagged for late payments, with their profits in decline or even non-existent. There might be other red flags for poor health too, like frequently switching suppliers and service providers and lots of out-of-court settlements. Behaviour is a big indicator of financial health, which is why you need to pay attention to it.

What’s The Best Measure of a Company’s Financial Health?

Liquidity: One of the key elements of assessing a company’s basic financial health. Liquidity is the amount of cash (and assets that are easy to convert to cash) the company owns to manage its short-term debt obligations. There are two ways to measure liquidity, the quick ratio (also known as the acid test) and the current ratio.

Solvency: Closely linked to liquidity is a company’s solvency – their ability to meet their debt obligations on an ongoing basis. Solvency ratios calculate a company’s long-term debt in relation to its assets or equity. This is an incredibly important thing to know if you’re assessing a potential customer’s financial health before extending them credit.

Operating Efficiency: Operational efficiency is key to financial success, and operating margin is one of the best indicators of efficiency. This considers a company’s basic operational profit margin after deducting the variable costs of producing and marketing the company’s products or services. This figure can show you how well the company can control costs, and what their long-term sustainability looks like.

Profitability: The bottom line of any company is net profitability. Hence why it’s called the bottom line! Companies can survive for years without being profitable, operating on the goodwill of it’s creditors and debtors. But to survive in the long run, a company has to eventually gain and maintain profitability. Net margin is a good way to measure this, but there are some other metrics you can use too.

Of course, no single metric can identify the overall financial and operational health of a company. But all of these together can give you a good overall view of their financial situation, and the health of the company as a whole.

Why Keep an Eye On Client Financial Health?

There are a few different reasons you should be watching out for the health of your clients, especially if they are a relatively new one. The most obvious is for you to understand your clients better, and be able to look out for the warning signs if things start to go wrong. Financial health monitoring means you can see the warning signs that your client might be in trouble before they become real problems, giving you time to intervene, or to prepare yourself. You can even be proactive and reach out with alternate payment plans or arrangements, so that the difficulty doesn’t impact either of you. You can even provide personalised advice a support, which they will likely be pleased to take. Ultimately, by keeping an eye on this information you can build a stronger relationship with your clients and protect your business at the same time.

At Debtcol we work closely with businesses of all shapes and sizes to not only collect their outstanding debts, but to monitor the financial health of their clients. We do this either on a one-off basis (including director searches) or on an ongoing basis to protect your cash flow. If you’d like to be able to predict client financial problems before they become problems for you, we’d love to help. Just get in touch with the team today to book your free consultation.