Small Business Financial Health Check: A Self-Assessment Guide

How healthy is your business financially? Most owners have a vague sense—“things are okay” or “we’re struggling a bit”—but can’t point to specific metrics.

This financial health check helps you assess where you stand across key areas. Be honest with yourself. The goal isn’t to feel good—it’s to identify what needs attention.

The Five Pillars of Financial Health

Your business’s financial health rests on five foundations:

1. Profitability: Are you making money?
2. Cash Flow: Do you have money when you need it?
3. Liquidity: Can you pay short-term obligations?
4. Debt Management: Is your debt sustainable?
5. Financial Systems: Are your processes sound?

Let’s assess each one.

Pillar 1: Profitability Assessment

Gross Profit Margin

Calculation: (Revenue - COGS) / Revenue × 100

Benchmarks by industry:

• Retail: 25-50%
• Service: 50-80%
• Manufacturing: 25-35%
• Restaurants: 55-65%

Score yourself:

• Above industry average = Healthy
• At industry average = Acceptable
• Below industry average = Needs attention

Net Profit Margin

Calculation: Net Income / Revenue × 100

Healthy ranges:

• 10-20%: Strong
• 5-10%: Acceptable
• 0-5%: Thin margins, vulnerable
• Negative: Loss, urgent attention needed

Score yourself:

• Above 10% = Healthy
• 5-10% = Acceptable
• Below 5% = Needs attention
• Negative = Urgent

Profitability Trend

Question: Is profitability improving, stable, or declining?

• Improving over last 12 months = Healthy
• Stable = Acceptable
• Declining = Needs attention

Owner’s Compensation

Question: Does the business pay you a reasonable salary?

Many owners don’t pay themselves fairly, hiding true costs. Could you hire someone to do your job?

• Yes, competitive salary = Healthy
• Somewhat, but below market = Acceptable
• No, or barely anything = Needs attention

Pillar 2: Cash Flow Assessment

Operating Cash Flow

Question: Does your core business generate cash?

• Operating cash flow consistently positive = Healthy
• Sometimes positive, sometimes negative = Acceptable
• Usually or always negative = Urgent

Cash Flow vs. Profit

Question: Is your cash flow similar to your profit?

Big gaps indicate issues (growing receivables, inventory, or capital spending).

• Cash flow closely tracks profit = Healthy
• Some variance but understandable = Acceptable
• Large unexplained gaps = Needs attention

Cash Reserves

Question: How many months of expenses could you cover with cash on hand?

• 3+ months = Healthy
• 1-3 months = Acceptable
• Less than 1 month = Needs attention
• Regularly running out = Urgent

Cash Flow Predictability

Question: Can you predict your cash position 30 days out?

• Yes, with confidence = Healthy
• Roughly, within 20% = Acceptable
• Not really = Needs attention
• No idea = Urgent

Pillar 3: Liquidity Assessment

Current Ratio

Calculation: Current Assets / Current Liabilities

Interpretation:

• Above 2.0: Strong liquidity
• 1.5-2.0: Adequate
• 1.0-1.5: Tight
• Below 1.0: Potential trouble paying bills

Score yourself:

• Above 2.0 = Healthy
• 1.5-2.0 = Acceptable
• Below 1.5 = Needs attention

Accounts Receivable Health

Questions:

• What percentage of receivables is over 60 days? (Target: under 10%)

• Are receivables growing faster than revenue? (Should not be)

• Do you have a collection process? (You should)

• Low aging, stable ratios, good process = Healthy

• Some aging but manageable = Acceptable

• High aging, growing receivables = Needs attention

Accounts Payable Status

Questions:

• Are you paying bills on time?

• Are any vendors threatening collection?

• Have you lost credit terms due to late payment?

• All bills current, relationships good = Healthy

• Occasionally late but managed = Acceptable

• Regularly late, stressed relationships = Needs attention

Pillar 4: Debt Assessment

Debt-to-Equity Ratio

Calculation: Total Liabilities / Total Equity

Interpretation:

• Below 1.0: Conservative
• 1.0-2.0: Moderate
• Above 2.0: Highly leveraged

Score yourself:

• Below 1.0 = Healthy
• 1.0-2.0 = Acceptable
• Above 2.0 = Needs attention

Debt Service Coverage

Question: Can you comfortably make debt payments from operating income?

Calculation: Operating Income / Annual Debt Payments

• Above 2.0: Comfortable coverage
• 1.25-2.0: Adequate
• Below 1.25: Tight

Score yourself:

• Above 2.0 = Healthy
• 1.25-2.0 = Acceptable
• Below 1.25 = Needs attention

Debt Purpose

Question: What is your debt financing?

• Growth investments (equipment, marketing): Generally appropriate

• Operating expenses (payroll, rent): Warning sign

• Past losses: Danger sign

• Debt funds growth investments = Healthy

• Mixed purposes = Acceptable

• Debt covers operating losses = Urgent

Interest Rates

Question: What are you paying on your debt?

High-interest debt (credit cards, merchant cash advances) erodes profit quickly.

• All debt at reasonable rates (under 10%) = Healthy
• Some high-interest debt = Acceptable
• Significant high-interest debt = Needs attention

Pillar 5: Financial Systems Assessment

Books Are Current

Question: How up-to-date is your bookkeeping?

• Within 1 week = Healthy
• Within 1 month = Acceptable
• More than 1 month behind = Needs attention
• Significantly behind = Urgent

Bank Reconciliation

Question: Are all accounts reconciled monthly?

• Yes, within first week of each month = Healthy
• Yes, but sometimes delayed = Acceptable
• Occasionally or never = Needs attention

Financial Reports

Question: Do you review financial statements monthly?

• Yes, P&L, Balance Sheet, and Cash Flow = Healthy
• Yes, but only P&L = Acceptable
• Quarterly or less = Needs attention
• Never or rarely = Urgent

Tax Compliance

Questions:

• Are all tax returns filed and current?

• Are payroll taxes deposited on time?

• Are estimated taxes being paid?

• All current, no issues = Healthy

• Current but occasional scramble = Acceptable

• Behind or uncertain = Needs attention

Separation of Finances

Question: Are business and personal finances completely separate?

• Yes, never mixed = Healthy
• Mostly, occasional crossover = Acceptable
• Frequently mixed = Needs attention

Scoring Your Assessment

Count your responses:

Healthy responses: ___ Acceptable responses: ___ Needs attention responses: ___ Urgent responses: ___

Interpretation

Mostly Healthy (15+ healthy responses): Your business is financially sound. Focus on optimization and growth. Consider working with an advisor on strategic planning.

Mostly Acceptable (10+ acceptable, few urgent): Your business is surviving but has room for improvement. Prioritize moving “acceptable” to “healthy” and address any “needs attention” items.

Several Needs Attention (5+ needs attention): Your business has significant financial weaknesses. Create an action plan to address the most critical issues first.

Any Urgent: Stop and address urgent items immediately. These can threaten business survival if ignored.

Action Planning

Prioritize Issues

Rank your “needs attention” and “urgent” items:

1. What threatens short-term survival? (Address immediately)
2. What’s causing the most damage? (Address soon)
3. What’s easiest to fix? (Quick wins build momentum)

Create Specific Actions

For each issue, define:

• What specifically needs to change?
• What’s the first step?
• Who will do it?
• By when?

Get Help Where Needed

Some issues require professional help:

• Significant debt: Financial advisor or workout specialist
• Tax problems: CPA or tax attorney
• System chaos: Bookkeeper
• Cash flow crisis: Both bookkeeper and business advisor

Schedule Follow-Up

Repeat this assessment:

• Monthly if you have urgent issues
• Quarterly if you have significant “needs attention”
• Annually if mostly healthy

Red Flags That Demand Immediate Action

Stop everything and act if:

• Can’t make payroll
• Can’t pay rent or essential vendors
• Behind on payroll taxes
• Bouncing checks or overdrafting
• Creditors threatening legal action
• Personally guaranteeing new debt to cover operating losses

These are survival issues. Get professional help immediately.

Building Financial Health

Improving financial health is a journey. Focus on:

Short-term (30 days):

• Get books current
• Reconcile all accounts
• Know your cash position
• Create accounts receivable and payable aging

Medium-term (90 days):

• Implement monthly financial review
• Address any urgent issues
• Improve one weak pillar
• Build or rebuild cash reserves

Long-term (12 months):

• Develop all five pillars to “healthy”
• Build 3+ months cash reserve
• Establish strong financial systems
• Create growth capacity

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Ready to improve your financial health? At Profit Path Books, we help small business owners build stronger financial foundations. Take our free assessment for a personalized analysis, or book a consultation to discuss your situation.