Your accounting documents are in order, you already know that keeping your accounts up to date gives you a solid foundation to understand your SME. Thanks to this, you can delegate part of your responsibilities and feel that, little by little, you can recover a balance between your personal life and work. But then, after a good weekend, you discover that the “petty cash” has little liquidity. How can you anticipate this before it happens?
This is where key financial health indicators come in, simple but powerful tools that will help you make decisions with more confidence.
- Liquidity, that is, your company’s ability to meet immediate payments, to respond in cash when an urgent commitment needs to be paid.
- Liquidity ratio (current assets / current liabilities): A value less than 1 indicates that you could have difficulties paying on time.
- Solvency, allows you to know if your company can assume all its debts, including long-term ones. It’s a more complete picture of your business’s financial stability.
- Solvency ratio (total assets / total liabilities): If it’s greater than 1, you’re in a more stable position.
- Profitability, measures the ability to generate real profits with your activity. It’s not just about selling more, but about having a margin left at the end that justifies the effort and risk. If you’re not earning, you’re wasting time or resources. This ratio will let you know: are you really earning from your activity?
- Net margin (net profit / income): Low profitability can be a sign that income doesn’t compensate for costs, or that there are areas that require adjustments.
- Debt; healthy debt can boost growth; excessive debt, however, can become a burden that suffocates your operation and leaves you without room for action.
- Debt ratio (total liabilities / net equity): High leverage isn’t always bad, but it is a warning to review whether you can sustain it.
The important thing is not to memorize formulas, but to understand what the numbers are telling you. These indicators don’t just serve you: banks, investors, or consultants also use them to evaluate your company. Having them clear and knowing how to explain them puts you in a much stronger position to negotiate and plan.
One of the most common mistakes is reviewing the numbers only when tax closing arrives.
Financial health is taken care of day by day. Even if you’re not an accountant, you can have a control sheet with income, costs, bank balances, and debts that gives you a quick view of your real situation. And if doing it alone is difficult for you, you can always rely on a manager or digital tools that facilitate monitoring.
If you need advice in this area, remember that you can request the free advisory service from the Economic Office of Galicia.
