Improve the Financial Health for Your Business in Less Than 30 Minutes

By: Paul Smith, Fargo & SE Center Director

Most business owners I’ve worked with know it’s vital to keep a pulse on the financial health of their business. However, many simply don’t have time to spend hours analyzing and interpreting numbers or haven’t developed a regular routine.

Here’s a simple framework to help you track key financial KPIs by focusing on six essential elements. This approach allows for a quick yet comprehensive financial review in minutes rather than hours, helping you identify and address problems before they spin out of control.*

In this process, we will review the three main financial statements: the income statement, balance sheet, and statement of cash flows.

If you’re not already reviewing these reports regularly, start by ensuring you can easily access them, either through your accounting software or by asking your bookkeeper or accountant. Each statement provides a different perspective:

• Income Statement: Shows your revenues, costs, and profits over a specific period.

• Balance Sheet: Summarizes what your business owns (assets), owes (liabilities), and your equity at a single point in time.

• Statement of Cash Flows: Tracks how cash moves in and out of your business through operations, investing, and financing activities.

Once you’re comfortable locating and reading these statements, use them to compare performance across periods and identify meaningful trends. These comparisons help reveal whether your business is improving, holding steady, or declining in specific areas. Review your key financial figures such as total sales, gross profit, and net income across the following timeframes:

• Current month (or quarter) vs. the previous month (or quarter): Shows short-term changes and momentum.

• Current month (or quarter) vs. the same period the previous year: Highlights seasonal patterns and year-over-year growth.

• Current YTD vs. the same period the previous year: Indicates overall progress and long-term performance trends.

Trends (income statement)

Monitoring financial trends over time is essential. Using the income statement, look at changes in sales, COGS, gross profit, operating expenses, and net profit. It’s often easier to spot trends by viewing these items as a percentage of total sales rather than in dollar amounts. Have sales, gross profit, and net income increased, decreased, or stayed relatively consistent? Identifying significant changes should prompt questions such as: Why has revenue increased while net income has declined?

Expense Control (income statement)

Effective expense management is vital for sustaining profitability. Operating expenses should align proportionally with changes in gross profit. If gross profit decreases, operating expenses should be adjusted accordingly to prevent erosion of net profit. Regularly reviewing and controlling expenses helps maintain financial stability.

Debt to Equity Ratio (balance sheet)

The debt-to-equity ratio compares the amount of money borrowed for your business with the amount invested personally. A lower ratio indicates a healthier balance between debt and equity, which is favorable to lenders and investors. Maintaining an optimal ratio enhances a company’s ability to obtain credit.

EBITDA/Long-Term Debt Availability (income statement)

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is an indicator of operational profitability and cash flow. Calculating EBITDA helps determine the capacity for long-term debt and can guide decisions on financing and investment opportunities.

Mis-Matched Financing (balance sheet)

Using appropriate financing for assets is crucial. Mismatched financing—such as using short-term loans for long-term assets—can strain cash flow and increase financial risk. Ensuring alignment between financing terms and asset lifespans helps maintain financial stability.

Cash Flow Activity Pattern (statement of cash flow)

Analyzing cash flow patterns provides insights into liquidity and operational efficiency. Understanding the sources and uses of cash enables business owners to anticipate shortages or surpluses, facilitating proactive cash management and informed decision-making.

Implementing the Process

This method offers a practical framework to help you understand your company’s true financial position and quickly identify problems and possible causes, leading to solutions and corrective actions (beyond the scope of this brief article).

To adopt this approach, set aside 30 minutes each month to review these six elements. Engaging with team members or advisors, such as your accountant or the SBDC advisor, during this review can provide additional helpful perspectives. This process is intended to complement, not replace, a thorough annual financial review and budget.

If you’d like help working through this process, conducting an annual financial health checkup, or addressing another area of your business, visit ndsbdc.org to register for our no-cost, confidential business advising services.

*Based on The 7-Minute Conversation, by Mike Milan.