Financial health check: How to determine the financial health of your company

How well is your business really doing? If you can’t answer that with confidence, it’s time for a financial health check. Understanding your company’s financial health isn’t just for accountants or investors. It’s essential if you want to keep your business running smoothly, spot risks early and make informed decisions about the future.

If you’re not a “finance person” (and many small business owners don’t consider themselves to be), getting started might feel intimidating. While you can find financial health assessment tools online that will give you a financial health score, a basic financial health check can be even simpler. This article breaks it down into the basics: why understanding business health is important, what key financial statements and financial ratios you should know about and some simple tips for improving the financial strength of your business.

Checking your business’s financial health and strength systemically

You can’t fix, adjust or build on something you don’t understand. For small businesses, financial health means having enough money in your different business bank accounts to cover day-to-day expenses, save for future growth and stay resilient through ups and downs. A regular financial health assessment is a pulse check that helps you keep an eye on issues you might not otherwise notice, like slow cash flow, rising costs or underperforming products.

Systematic financial assessment for your business can help you:

• Avoid cash flow surprises
• Understand your profitability
• Spot trends or red flags
• Set realistic goals for growth
• Make more confident, data-backed decisions

As a general rule, it’s important to keep your business finances separate from your personal finances — and this article solely focuses on how to assess the financial health of your business.

Key financial statements to know

It’s clear by now that if you want to check your business’s financial health, you need a solid picture of where your money is coming from, where it’s going and what you own versus what you owe. But how do you actually get that snapshot? Cue financial statements.

Even if you work with an accountant or bookkeeper, understanding the basics of these reports helps you stay in control and ask better questions.

Here are the three essential financial statements:

Balance sheet

The balance sheet shows your company’s assets (what you own), liabilities (what you owe) and equity (your ownership stake) at a specific point in time. It’s a snapshot of your business’s overall financial strength.

If you’re doing your books manually, start by listing all your assets and liabilities, then calculate equity as: Equity = assets – liabilities

Learn more in our step-by-step guide to preparing a balance sheet.

Income statement

Also called a profit and loss (P&L) statement, this report summarizes your revenue, costs and expenses over a period of time — usually monthly, quarterly or annually. At its essence, it shows whether your business is making money or losing it.

If you’re preparing it yourself, you can create a very simple version in a spreadsheet by subtracting total expenses from total income for the period.

Learn more about how to prepare a profit and loss statement.

Cash flow statement

This statement tracks the actual flow of money into and out of your business, regardless of when revenue is earned or bills are due. It helps you understand whether you can cover your immediate expenses, even if you’re profitable on paper.

To start, list all incoming cash (like customer payments and loan funds) and outgoing cash (like rent, payroll and supplies) for a given time period.

Learn more about how to calculate cash flow for your business.

Don’t have these statements yet? You’re not alone. Many small business owners don’t formally create them at first — but it’s never too late to start. Most accounting software can automatically generate your financial statements based on the data you input. A simple spreadsheet can also work. You can get started by pulling numbers from your invoices, receipts, bank statements and expense records.

It's also a good idea to have a financial professional (like a bookkeeper, accountant or tax preparer) review your statements regularly to make sure they’re accurate and complete.

Key financial ratios for small business

Once you have your financial statements in place, the next step is to go beyond the numbers and interpret what they mean. That’s where financial ratios come in.

Think of ratios as financial health indicators — simple formulas that help you evaluate specific aspects of your business, like profitability, stability or your ability to cover short-term costs. You don’t need to memorize dozens of formulas or build complex dashboards. Just a few basic ratios can reveal a lot about how your business is doing and where you might need to adjust.

If you’re tracking your finances using software or spreadsheets, you can calculate these manually or use built-in reporting features to pull them automatically. They’re especially useful if you’re comparing performance over time or preparing to apply for a business loan or line of credit.

Here are a few of the most helpful ratios for small business owners:

Liquidity ratios

These show whether your business has enough cash or assets to cover short-term obligations — like bills, payroll or unexpected expenses. There are a few different types of liquidity ratios. These two are most relevant to small business owners:

• Current ratio = current assets ÷ current liabilities
  A ratio above 1 likely means you have enough assets (like cash, inventory, receivables) to cover what you owe in the near term.
• Quick ratio = (current assets – inventory – prepaid expenses) ÷ current liabilities
  This is a more conservative version of the current ratio. It excludes inventory and focuses on the most liquid assets, like cash and receivables.

Profitability ratios

Profitability ratios measure how efficiently your business is turning revenue into profit. They can help you understand whether your pricing, costs or sales volumes need adjustment. Here are three specific profitability ratios to explore, though there are many more:

• Gross profit margin = (revenue - cost of goods sold) ÷ revenue x 100
  This focuses on how much money you have after subtracting the direct costs of making or delivering your product or service.
• Net profit margin = (net income ÷ revenue) × 100
  This is the percentage of revenue left after paying for all expenses, including direct costs, operating expenses, interest on debt, and taxes.
• Operating profit margin = (gross profit – operating expenses) ÷ revenue × 100
  This ratio gives you a sense of how profitable and efficient your business is.

Solvency ratios

Solvency ratios help you understand your business’s long-term financial stability, which is especially important if you’ve taken on loans or are considering expansion. There are several types of solvency ratios for different scenarios, but here are two to start with:

• Debt-to-assets ratio = Total liabilities ÷ assets
  This tells you how much of your company is funded by debt, which gives insight into your ability to pay off that debt. A ratio above 1 typically indicates that your company has significant debt that might inhibit your ability to meet financial obligations.
• Debt-to-equity ratio = Total liabilities ÷ equity
  This shows how much of your business is financed by debt versus your own investment. Lower ratios suggest more financial stability, while higher ones could signal risk if revenue drops. A ratio of 2 to 2.5 is considered “good” for most companies.

Tip: Ratios aren’t just for outside investors. They’re also a practical tool for your own decision-making. Try tracking one or two each quarter to see how your business evolves over time.

FAQs on determining business financial health

How often should I check the financial health of my business?

Aim to review your financials monthly, with a deeper assessment each quarter. A regular schedule helps you track trends and act quickly, if needed.

What are the most critical financial health indicators and metrics for small businesses?

Start with cash flow, net profit margin and current ratio. These provide a strong foundation without being too overwhelming.

How can I improve my business’s financial health with limited resources?

Focus on what you can control: reducing unnecessary costs, staying on top of receivables and possibly revisiting your pricing. Use tools you already have, like basic spreadsheets or low-cost bookkeeping apps.