Understand what the company’s financial situation is and how to diagnose it

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Understand what the company's financial situation is and how to diagnose it

Table of Contents

Regardless of the size and the segment in which a company operates, managers must know how to diagnose their financial situation. After all, this directly impacts any decision to be made in the short, medium and long term. long term.

In the basics of any equation to ensure the sustainability of a business, accounts have to hit the end of the month. Preferably, in a positive way, generating profits.

Without proper control and the perception of how much is being collected and invested, it is almost impossible to manage a company with quality. Therefore, in this post we will show you what are the best practices to monitor the financial situation of an enterprise.

We will talk about the following subjects in the following topics:

  • What is financial situation?
  • And economic situation?
  • Why is knowing the company’s financial situation important?
  • How to identify the company’s financial situation?
  • Make a feasibility study of your business
  • Track the best indicators for your goals
  • Analyze the Balance Sheet
  • Keep an eye on the Statement of Income for the Year (DRE)

Good reading!

What is financial situation?

In short, the financial situation has to do with the company’s cash balance. In other words: the clear, transparent and precise notion of how much was collected in a given period, and the expenses incurred in the same monitored period.

In other words: if the company has its accounts up to date, the budget can be made more flexible to achieve different objectives and there are no unforeseen events in the balance sheets made, the company’s financial situation is good.

On the other hand, when there are not enough resources to settle the day-to-day accounts, the most logical conclusion is that the financial situation is not going well – which also raises the warning sign to understand the reasons for this.

And economic situation?

There is also another concept that often generates many doubts among entrepreneurs. And while it is equally relevant, it does not have the same meaning as a financial situation.

The economic situation is directly related to the company’s profits and losses. In this way, a favorable economic situation emerges with a high amount of gross equity – in contrast, the accumulated deficit and the continued need for loans and the contribution of third parties presents a negative reality.

No wonder, this kind of neglect tends to be one of the main factors that lead companies to fail.

Why is knowing the company’s financial situation important?

Companies looking for survival and longevity in their industry have to focus on monitoring both the financial and the economic situation.

Both will present real data on the moment and the prospects for constant planning for growth, maintenance and sustainability of the business. And it is worth mentioning that they differ in some points.

For example: companies with a good economic situation may not necessarily be in financial order. But the reasons for this can vary – many defaulters or installments – and hence the importance of constantly monitoring these numbers.

How to identify the company’s financial situation?

As we mentioned at the beginning of this article, there are good practices that favor the control of your financial situation in order to avoid unforeseen circumstances and risks for your business.

And, next, we will talk about some actions and strategies that are in line with the best market practices to monitor your financial situation. See what they are!

Make a feasibility study of your business

This work is usually done before the opening of a company. Through the business feasibility study, it is easy to identify economic stability in numbers, in addition to the profit-generating capacity of this enterprise. For this, the following performance indicators are used:

  • periodic billing, which indicates the quantity and items that are traded on a daily basis;
  • variable costs, which represent the company’s expenses so that there are no losses in pricing and periodically no surprises in the rendering of accounts;
  • fixed costs, which are recurring expenses and which will be part of your daily life equally – or at least close;
  • contribution margin, which is the index capable of pointing out the company’s profitability and equilibrium point;
  • operating profit, that the numerical result is treated after all costs (variable and fixed) are accounted for;
  • sales prices, allowing a composition that is competitive and also that generates profits;
  • cash flow, the great friend of the monitoring of his financial situation, since he measures the inputs and outputs ensuring total control of what is happening.

With this, your company acquires more stability to support itself, since the projected numbers will serve as a compass to keep the financial situation in order and the economic situation in constant development.

In fact, financial planning is one of the main pillars that support any company. To learn more about it, our invitation is for you to read an article that explores everything you need to know to make a planning focused on 2021!

Track the best indicators for your goals

Economic indicators help guide your business. They highlight, as shown above, different scenarios and situations that guarantee assertiveness to your business decisions. Some of them that make all the difference in monitoring the financial situation:

  • liquidity ratios, which help assess your ability to honor company payments;
  • indebtedness index, which indicates the capital used via third parties (such as bank loans, among others);
  • profitability index on sales, which establishes the relationship between the operating profit of your business and the sales made;
  • activity index, whose objective is to point out the average time that your company takes to receive the value of each sale made;
  • activity index 2, which in turn points out the average time it takes to pay your suppliers.

Do you realize how much all of this, little by little, builds a positive and safe scenario to assess the company’s momentum and its financial situation in a consistent manner?

Analyze the Balance Sheet

The Balance Sheet assesses the situation of your assets in a given period. By monitoring it, your financial management acquires a longer view and needs short, medium and long term scenarios for your business to thrive continuously.

Keep an eye on the Statement of Income for the Year (DRE)

With the Statement of Income for the Year, you have in your hands an (informative) report that points out the formation of your company’s net profit – both quantitatively and qualitatively.

In alliance with the Balance Sheet, their financial situation is better monitored and it becomes more difficult for the finance department encounter unpleasant surprises along the way.

Now, how about putting into practice everything we saw here on best practices to identify your financial situation? But before, take the time to leave a comment in the field below, whether to ask more questions about the subject or even to share your experiences on that topic!

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