Mid-Year Financial Health Check: 5 Key Metrics to Review Now

As we approach the midpoint of the year, it's the perfect time for businesses to take a step back and assess their financial health. At Fiscal Sense, we believe that regular financial check-ups are just as important as annual reviews, giving you the opportunity to make timely adjustments that can significantly impact your year-end results.

May is the ideal month to conduct a mid-year financial health check before the summer months arrive.

Here are the five key metrics every business should review now, along with what they mean for your financial wellbeing and the actions you can take based on your findings.

1. Current Ratio: Understanding Your Short-Term Financial Health

Your current ratio is a fundamental liquidity indicator that reveals whether your business can meet its short-term obligations.

How to calculate it: Divide your current assets by your current liabilities.

Current Ratio = Current Assets ÷ Current Liabilities

What it tells you:

• Ratio greater than 1: You have more current assets than liabilities (generally positive)
• Ratio less than 1: You may struggle to meet short-term obligations
  
• Ideal range: 1.5 to 2.0 for most businesses

Action steps based on your current ratio:

• If too low (under 1.2): Focus on accelerating accounts receivable, extending accounts payable where possible, or converting non-current assets to cash
  
• If too high (over 3.0): Consider whether you're utilizing your assets efficiently—you might be missing investment opportunities
  

Having clean, up-to-date books is essential for calculating an accurate current ratio, as outdated receivables or unrecorded liabilities can skew this critical metric.

Example: If your business has $120,000 in current assets (cash, accounts receivable, inventory) and $80,000 in current liabilities (accounts payable, short-term debt), your current ratio would be:

Current Ratio = $120,000 ÷ $80,000 = 1.5

This 1.5 ratio indicates your business has $1.50 in current assets for every $1 in short-term obligations—a healthy position within the ideal range.

2. Profit Margins: How They Compare to Industry Standards

Profit margins reveal the health of your business model and operational efficiency.

Three key profit margins to review:

• Gross Profit Margin = (Revenue - Cost of Goods Sold) ÷ Revenue
  
• Operating Profit Margin = Operating Profit ÷ Revenue
  
• Net Profit Margin = Net Profit ÷ Revenue

What they tell you:

• Gross margin: The efficiency of your production or service delivery
  
• Operating margin: How well you manage overhead expenses
  
• Net margin: Your overall profitability after all expenses

Action steps based on your profit margins:

• If margins are declining: Identify specific cost categories that are increasing
  
• If below industry averages: Benchmark your expenses against industry standards
  
• If gross margin is healthy but net margin is low: Focus on reducing overhead costs
  

Understanding industry benchmarks is crucial for interpreting your profit margins. We can help you access relevant comparisons for your specific industry.

Example for a service business:

Revenue: $500,000
Cost of Services: $300,000
Operating Expenses: $100,000
Interest and Taxes: $25,000
Net Profit: $75,000

Calculations:

• • Gross Profit Margin = ($500,000 - $300,000) ÷ $500,000 = $200,000 ÷ $500,000 = 40%
    
  • Operating Profit Margin = ($200,000 - $100,000) ÷ $500,000 = $100,000 ÷ $500,000 = 20%
    
  • Net Profit Margin = $75,000 ÷ $500,000 = 15%

If industry averages for your service business are 45% gross margin and 12% net margin, you'd know your cost of services is higher than peers (lower gross margin), but you're managing overhead efficiently (higher net margin).

3. Accounts Receivable Aging: Strategies to Improve Collection

Your accounts receivable aging report shows the health of your collection processes and potential cash flow issues.

How to analyze it:

• Group outstanding invoices by age (0-30 days, 31-60 days, 61-90 days, 90+ days)
  
• Calculate the percentage of receivables in each category
  
• Track the trend of aging accounts over recent months

What it tells you:

• Increasing older balances: Collection problems that could impact cash flow
  
• Concentration of past-due amounts with specific customers: Client-specific credit risks
  
• Overall collection period: Working capital tied up in receivables

Action steps based on your A/R aging:

• Implement more aggressive collection procedures for older accounts
  
• Review credit policies for customers with consistently late payments
  
• Consider early payment discounts for problematic accounts
  
• Evaluate the need for invoice factoring for immediate cash flow

Maintaining accurate and current accounts receivable records is one of the most impactful services a bookkeeper can provide, as it directly affects your cash flow.

Example: Your A/R aging report shows:

0-30 days: $45,000 (45%)
31-60 days: $25,000 (25%)
61-90 days: $20,000 (20%)
90+ days: $10,000 (10%)
Total A/R: $100,000

If three months ago your 90+ day category was only $3,000 (3% of total), the increase to $10,000 (10%) indicates a concerning trend that requires immediate attention. Further analysis might reveal this is concentrated among just two customers who need customized collection strategies.

4. Cash Runway: What It Means for Your Business

Your cash runway calculates how long your business could operate before running out of cash, assuming no additional income.

How to calculate it: Divide your current cash reserves by your average monthly expenses.

Cash Runway = Cash Reserves ÷ Average Monthly Expenses

What it tells you:

• Short runway (under 3 months): Potential near-term cash flow crisis
  
• Medium runway (3-6 months): Limited buffer against market changes
  
• Long runway (6+ months): Strong position to weather downturns or fund growth

Action steps based on your cash runway:

• If too short: Develop immediate cash conservation strategies
  
• If adequate but could be improved: Create a cash flow forecast for the next six months
  
• If very long: Consider whether excess cash could be better deployed in the business

Having an accurate understanding of your true monthly expenses requires meticulous bookkeeping and proper categorization of one-time versus recurring expenses.

Example: If your business has $240,000 in cash reserves and average monthly expenses of $60,000:

Cash Runway = $240,000 ÷ $60,000 = 4 months

This means your business could operate for approximately 4 months without any additional income—a moderate runway that provides some security but might warrant attention if you anticipate market challenges or seasonal downturns.

5. Debt-to-Equity Ratio: Implications for Future Growth

Your debt-to-equity ratio reveals how your business is financed and your capacity to take on additional debt if needed.

How to calculate it: Divide your total liabilities by your total equity.

Debt-to-Equity Ratio = Total Liabilities ÷ Total Equity

What it tells you:

• Low ratio: More equity financing, potentially more conservative approach
  
• High ratio: More debt financing, potentially higher risk but also higher returns
  
• Industry specific: Acceptable ratios vary widely by industry

Action steps based on your debt-to-equity ratio:

• If too high: Focus on debt reduction or equity increases
  
• If too low: Consider strategic debt for growth opportunities
  
• In either case: Evaluate the cost of debt versus equity capital

Understanding your true liability position requires comprehensive bookkeeping that accounts for all obligations, including leases and other commitments that might not appear on simplified financial statements.

Example: If your business has $300,000 in total liabilities and $500,000 in equity:

Debt-to-Equity Ratio = $300,000 ÷ $500,000 = 0.6

This ratio of 0.6 means your business has 60 cents of debt for every dollar of equity—generally considered a conservative financial structure. If the industry average is 1.2, you might have the capacity to take on additional strategic debt to fund growth opportunities without overextending yourself.

Turning Metrics Into Action

Reviewing these five key metrics provides a holistic view of your business's financial health at the mid-year point, but the real value comes from the actions you take based on these insights.

At Fiscal Sense, we provide the accurate, up-to-date financial records that form the foundation for calculating these critical metrics. Our detailed and organized bookkeeping services ensure that when you're ready to assess your mid-year financial health, you have reliable data from which to work.

While interpreting these metrics and deciding on strategic responses falls within your business leadership role, having access to clean, well-organized financial information makes this analysis possible. Without accurate books, even the most sophisticated financial analysis will yield misleading results.

Ready to ensure your financial records are prepared for a mid-year health check? Contact us today to discuss how our bookkeeping services can help you maintain the accurate financial data needed to monitor and improve these critical metrics.

 ________________________________________________________
Fiscal Sense specializes in providing comprehensive bookkeeping services that ensure your financial data is accurate, organized, and ready for strategic analysis. Our team of professionals is dedicated to maintaining the detailed financial records that support sound business decision-making.