In today’s unstable economy businesses are tasked with making constant decisions that require careful analysis in a fast past environment.

Understanding financial statements allows stakeholders to have access for information related to the business which allows the business to improve its operational efficiency, reduce costs and raise capital.

Understanding the different types of financial statements and how to decipher the numbers within them is crucial for making informed business decisions.

how-do-financial-statements-help-with-decision-making-300x300 How do Financial Statements Help with Decision Making?

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Quick Recap: Three Financial Statements

 There are three primary financial statements that are standard for any business to create: the balance sheet, the income statement, and the cash flow statement.

The financial statements of a company are factual because they show what happened to the company over a certain time period.

After analyzing the information, the manager of the company can determine whether or not the company can use its existing cash reserves to pay for operating expenses or if it needs to secure additional credit.

To sum up:

  • The balance sheet details where an organization’s cash comes from and where it goes.
  • The income statement reflects the performance, detailing the incoming revenues and outgoing costs.
  • A company’s cash flow movement is reflected in its cash flow statement.


Keep investors informed

When determining a company’s value, investors and analysts rely heavily on its financial statements.

This helps them determine whether or not it is sensible to put money into the company. Presenting full financial statements to investors ensures they have all the data they need to evaluate your business.

Such analysis would include looking at the business:

  • Financial strength through looking at the balance sheet and how much the business is levered.
  • Financial performance through analyzing the earnings in the income statement historically and comparable to its competitors.
  • Cash flow management through looking at cash flow from operating activity and cash movement in general.


Assist financers to take decisions

Creditors such as banks and bondholders also depend significantly on financial accounting. Credit ratings help lenders evaluate a company’s reliability to repay loans.

Businesses must have accurate financial records to submit along with their loan application to a bank or other lending institution. All assets and liabilities, both short- and long-term, are listed in the financial statements. This is how potential lenders can assess your creditworthiness: by reviewing your financial records.


Assist businesses in taking decisions by measuring performance

Having a system in place to monitor the financial results of your efforts is extremely important. Review the income statement for the period in question and mentally note all direct costs that can be directly attributed to sales.

Businesses can gain insight into the big picture by learning the ins and outs of the company’s finances, which will help them to make better decisions and set more realistic goals.


Final Thoughts 

In a nutshell, having access to a variety of financial statements, gives investors and lenders more information and allows them to make the right decision about a company.


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