The importance of financial health check
It is normal these days to get a reminder from the doctor or dentist to come in for a health check ( depending on the country you live). As the saying goes, ‘ prevention is better than cure’. But when it comes to financial health checks, we are still not used to doing this on a regular basis, even though its simpler and less painful. Experts advise us to do this at least every 12 months.
A financial health check like the medical one can prevent financial worry as well. For companies with financial statements, the balance sheet is the way to get started and it is easy to separate assets which can either be current ( easily convertible to cash such as companies owning your organisation money, investments that you have or cash in the bank), non current assets are more tangible assets like building, machinery, furniture etc. Once the assets are added up, you then take off the liabilities such as loans, mortgages, credit card balances etc. The above will show the net assets of the company which should be positive and the more positive the better.
The same analysis can be used by individuals to check the state of their financial health. By doing this, people can understand and hopefully deal with the state of their finances better. The balance sheet for the individuals refer to the state of their financial affairs as well. The income statement or profit and loss account also applies to individuals, this is how much you earn less your expenses. Any left over is your profit or surplus for that month or period.
This exercise can help to put your mind at rest, but most importantly can help prepare for the future. The exercise can help to determine where income is coming from and whether those income can sustain you in the long run. There are people who make money from sources such as properties and investments or from their part time ‘hustle’ or have passive income, is this good enough to sustain you in the future or do you have to do more?. In some cases, the income statement can help to determine if you need to reduce your outgoings.
Financial health check also allows you to review your strategy, if it not working, may be its time to move on, check what others are doing and focus on your core competencies. The world is changing, don’t get stuck in the past. Check below on the collapse of Thomas Cook and there will be other companies to follow. Change is the only thing that is constant, your strategies must also evolve with the times.
Strategy must be right and move with the times.
Another important part of the financial statement is the cash flow. There is a reason why cash is king. In September 2019, Thomas Cook; the package holiday company went burst. It had over 19 million customers a year, with around 600,000 still on holiday as at the time of its demise, over 22,000 employees, revenue was increasing at around £9 billion per year. All the good points, but it had debt of over £1 billion and to service such a huge debt, it needed a lot of cash and more profit than it was making. In the end, shareholders and the banks decided not to lend more money and the game was over.
What went wrong?, the company was stuck in the past. Most people now book their holidays on-line, much cheaper and you can put your package together more flexibly. Thanks to cheap airlines like Ryanair and EasyJet, the package holiday business is no longer viable, but Thomas Cook still kept hundreds of high street shops. At a time of Bookings.com and Expedia.com who needs high street shop? But despite their woes, the CEO still received a pay packet in excess of £1m per year. Executive salaries should reflect actual performance.
Some small firms like large organisations also need to review their strategies constantly.