Key indicators of financial health:

  1. Positive Cash Flow

– More cash coming in than going out

– 3-6 months of expenses in reserves

  1. Profitable Operations

– Consistent positive net profit

– Net profit margin of 10-20%

  1. Healthy Current Ratio

– Current Assets / Current Liabilities should be > 1.5

– Shows ability to pay short-term obligations

  1. Manageable Debt

– Debt-to-Equity ratio under 2:1

– Able to make all debt payments on time

  1. Timely Accounts Receivable

– Most invoices paid within 30-45 days

– Days Sales Outstanding (DSO) under 45

  1. Growing Revenue

– Year-over-year revenue growth

– Diversified customer base (no single customer over 20% of revenue)

  1. Controlled Expenses

– Operating expenses stable or decreasing as % of revenue

– No unnecessary spending

Warning signs:

  • Consistently using credit cards or lines of credit to make payroll
  • Frequently late on vendor payments
  • Declining profit margins
  • Increasing accounts receivable aging
  • Can’t pay quarterly estimated taxes

Action: Review financial statements monthly and meet with your accountant quarterly to assess financial health.