Financial Health

The amount spent, saved, debt, others are aspects of monetary health

Matthew Retzloff

Reviewed by

Matthew Retzloff

Expertise: Investment Banking | Corporate Development


August 16, 2023

The money an individual or organization makes alone cannot be the only thing determining their financial health. It also takes into account other aspects of the ability of the individual or organization to meet their obligations and increase growth prospects.

Monetary health has many different components that are used to analyze the health of an individual or an organization. The amount spent, the amount saved, the level of debt and the amount of financial planning are all critical aspects of health.

The organization's health can also be improved by strategies to ensure that its financial health does not diminish but improves over time.

The health of an organization’s finances is important to its shareholders and potential investors. It is also important to the suppliers as if an organization is not financially healthy, the suppliers are less likely to give them more inventory on credit.

The financial health of an individual is important to them. They need to ensure that they are at a point where they can be financially healthy. This metric is important as it shows them how close they are to being unable to pay their bills.

For those wishing to improve their financial health, some tools can be utilized to improve it slowly.

Budgeting and planning are the two tools that can be used by an individual or an organization to improve. These two tools allow the user to set plans and expectations. Then, following the plan will improve their health in the long run.

What is Financial Health?

An individual's financial health means the individual's financial position or the state of their finances. The better the amount of money they are saving and their use of tools such as budgeting and taking on less debt, the better the health of their finances.

The better their health, the more secure they will be. They will have less chance of going bankrupt and can pay any financial obligations as they fall due.

Having good health with their finances also opens doors for them to get a better quality of life. It allows individuals to not only afford their essential needs in life but those things that they want to have just for their pleasure and enjoyment.

It is also detrimental to the individual’s health as well. Being constantly stressed about their financial position can lead to them developing some illnesses that may negatively impact their lives and productivity.

Apart from individual health, there is also business health. Unlike that of the individual, business health is important to more parties outside of this that are internal to the organization, which shows why there is more need for better health of their financial affairs.

An organization with better health will have more freedom to get more inventory on credit from their suppliers due to the suppliers having more confidence that they will be able to pay the amount they owe.

It will also be beneficial for them when they are trying to get a loan from the bank, as when the banks are analyzing them, they look at the financials to determine if they will approve the loan or not.

Potential investors also look at the business's health to determine whether the organization is a good investment. This opens doors for the organization to have different avenues of raising funds, as they can issue new shares to get more funds.

An organization's finances' good health allows it to be more effective in its day-to-day operations. In addition, it opens doors for them to increase how the organization can raise funds to increase health.

Individual and Business Financial Health

There is a difference between the health of an organization and that of an individual due to how they both operate.

The differences between the two are that there are many more expenses for the business compared to an individual. They also have to pay people to do the work that gives them revenue, whereas the individual works independently.

1. Individual

For an individual, their health has to do with their net worth and the amount to which they have debt. An individual’s net worth is calculated by taking their assets and subtracting the debt they owe.

Individual monetary health measures the likelihood that the individual will become bankrupt and unable to make the payments; if the debt is over a certain percentage, it will not be sustainable and will lead to missing payments.

Individuals need to be making strategies to continually monitor their finances' health to ensure they are stable. If they do not, this may lead to them having financial problems, which could lead to them becoming homeless.

An individual’s monetary health is important as their health indicates their ability to meet financial obligations. The ability to do so has been found to have implications on their health and well-being.

2. Business

The organization's monetary health is an important indicator to the investors about the going concern of the organization. That is the ability of the organization to continually keep going over not only the next period but indefinitely, which means the ability not to go bankrupt.

If they are continually spending the money they are gaining from their business operations and not saving them to keep the organization stable; it may lead to some questions from their stakeholders about the health of their finances.

An organization that does not have a healthy financial ability may find itself having problems. That is why the organization must put systems in place to ensure that the health of the organization is not put at risk.

How to determine Financial Health for an organization

Let's take a look how to determine financial health for an organization:

1. Review the balance sheet

A balance sheet is a statement that shows the company's financial situation at a specific point in time. It gives a quick overview of the company's assets, obligations, and owner’s equity.

The balance sheet gives information about a company's health by analyzing the following:

  • The ratio of the company's debt to equity
  • The business's short-term liquidity
  • The time it takes to collect unpaid invoices from clients and pay suppliers.

2. Review the Income Statement

The income statement examines revenue, costs, and profits made to demonstrate a company's financial status and performance over a time period. It may be produced for any period using a trial balance of transactions from any two points in time.

By assisting in your analysis of the following, the income statement gives information about a company's health by reviewing the following:

  • The gross profit margin for items sold
  • The amount of revenue that generates a profit after all costs
  • The amount of revenue that is increasing throughout specific accounting periods

3. Review the Cash Flow Statement

The cash flow statement gives specific information on how a business utilized its cash during a certain accounting period.

It displays the cash flow sources and several expenditure categories, such as operating, investing, and financing activities. The beginning and ending cash balances for the whole time are then reconciled.

The cash flow statement assists in your analysis of the following to provide information about the following:

  • The company's liquidity status
  • Sources of funding
  • Free cash flow generated for additional investments in assets or activities
  • Whether the total cash has risen or reduced, among other factors

4. Financial Ratio Analysis

Financial ratios are effective tools for assessing the overall financial health of your business and may help you make sense of the data in financial statements. Ratios can be categorized into a number of different subgroups, such as profitability, liquidity, solvency, efficiency, and value.

It is essential for all professions, including business owners, entrepreneurs, workers, and investors, to understand a company's financial situation.

You may learn about your company's health by examining its financial statements, and you can use the knowledge you gain to take business and professional-enhancing measures.

How to determine Financial Health for an Individual

Let's now take a look for an Individual:

1. Net worth

The value of all of your assets minus all of your obligations is your net worth. It is simple to use and comprehend. It is positive when your net worth grows. When it decreases, that is a cause for worry.

In that it does not consider the kind of assets you own, net worth does have a blind spot. If you put yourself in the position of being 50 and having a $1 million net worth, you could feel successful.

However, it can be misleading if that also contains a $750,000 home and a $75,000 automobile. You have a car that will probably depreciate 7.5% of your net value, and your retirement funds are significantly behind schedule.

2. Savings rate

Your savings rate is the percentage of your monthly income that you set aside. Your savings rate is 10% if your monthly salary is $9,000 and you save $1,000.

You may do this by using your gross or net income, but if you have pretax deductions like 401(k) contributions, utilizing your gross income may be easier.

3. Debt-to-income ratio

You divide all your monthly debt payments by your gross income to get your debt-to-income (DTI) ratio. Lenders often look at this measure when you apply for a loan or credit line.

As a general guideline, your debt is manageable if your DTI ratio is 30% or below.

4. Income

Although money isn't everything, it undoubtedly significantly influences your standard of living. Your income should be scrutinized to see if it has been increasing annually by at least 3 to 5 percent (any less will barely keep up with inflation).

In general, you should be earning more money as you advance in education and experience; however, there may be a few years of stagnation or decline depending on personal circumstances.

Tips on Increasing Your Disposable Income

To improve financial health, some strategies can be put in place to improve overall health

The strategies that can improve health are:

1. Monitoring spending

The main way in which it can be improved is by monitoring spending.

Ensuring that the amount being spent is decreased leaves more money, so in case an event may decrease the amount being made, they have money that they weren’t spending.

A way to do this is not to buy the most expensive products. You can buy the cheaper products, and although it will decrease spending by a little at the moment, in the long term, these amounts will accumulate and lead to better spending habits.

2. Saving more

The most important strategy is to save more money. When you save more money, this leads to a better financial position for the individual or organization by allocating more of the money received and saving it rather than spending it to make more.

By saving more money, it allows there to be money that can be used at any point when the revenue stream is decreased for some reason. There may also be times when there is a loss, and the savings can be used to cover any additional costs.

3. Decreasing debt

The main thing that can decrease the financial health of an individual or organization is debt. The level of debt decreases their financial health; the more obligation they have, the higher their bankruptcy risk.

Debt like loans, credit card debts, and mortgages are all forms that will lower financial health and must be minimized at all costs. 

When the need for debt arises, they must look at all other areas they can get money from before they take on more debt.

4. Budgeting

The use of budgeting as a tool can increase the financial health of an organization. When the budget is done, it allows the user to have a goal and allows them to have boundaries that are easier not to cross.

When the budgets are constantly used, it also allows the users to make the budgets more precise.

There will be fewer deviations from the budgets and actuals, thus making the budgets more accurate and better decision-making tools to improve health.

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Researched and authored by Abdulrahman Nur | LinkedIn

Reviewed and edited by Tanay Gehi | LinkedIn

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