We all have heard of the term “Physical Fitness”. But, what is that “Financial Fitness”? This is nothing but assessing how stable is a person’s financial position.
How do people judge the physical fitness of an individual?
Naturally they do by looking at the physical appearance of the person. If he does not have any physical deformity and nothing unusual in his behavior then he is considered to be fit and healthy.
If the same person is taken to a medical laboratory and subjected to tests like Blood Sugar, Blood Pressure, Lipid Profile, CBC, ECG and so on (Master Health Checkup) and the results of the tests are within the prescribed limits, then he may be concluded to be healthy.
If the results of the tests done are not within the prescribed limit (Higher Blood Sugar level, High BP, Deviations in ECG and so on), then though he appears to be physically healthy, he needs to consult a medical practitioner, take his advice, follow the recommended medication, exercise, dieting and so on to keep his medical condition stable and not allow them to deteriorate.
Otherwise, if the gentleman does not consult any doctor or ignores the advice of the doctor, do not take proper medication, do not follow recommended diet, then all of us know pretty well that the condition of the person may over a period of time aggravate and serious health issues would become inevitable in future.
So it is recommended that consultation with a doctor and adherence to his advice for his wellbeing is essential.
Now, how do people judge the Financial Fitness of an Individual or a business organization?
Naturally by the same way, looking at his life style, the bungalow or house in which he lives, the type of car he drives and the number of persons employed in his business, any other visible assets (Financial Assets and Liabilities are not visible).
But in the same way, if the financials of this individual or the business organization is assessed and analyzed based on certain parameters by a Financial Planner like,
- Net Worth
- Debt Ratio
- Liquidity Ratio
- Savings Ratio
- Solvency Ratio
then they will be in a position to conclude whether this individual or his business is sound and healthy or not.
If the outcome of the assessment is within the recommended limits, then he or his business is considered healthy. A financially fit person or an organization will be in a better position to withstand the financial stress caused by uncertainties in addition to fulfilling his dreams and ambitions and that of his family members as well.
If the assessment proves to be inconsistent with the recommendations, then he or his business is considered to be fragile meaning, cannot withstand the financial consequences arising out of uncertainties like Covid 19 situation, unexpected ailment, untimely death or disability of the key person of the family or business.
So, it is recommended that any individual or business organization remain financially healthy at all times. We will find the answers to all of the following questions to assess one’s financial fitness in my next post.
- What do these ratios mean?
- How are they measured or assessed?
- How does it affect the individual’s family or business?
- What are the remedies?