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.
Attribution: The icons has been designed using resources from flaticon.com
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.
Related Posts:
- 6 Reasons Why Accounting is the Language of Business
- 4 Reasons Why Accounting is Important in Everyday Life
- Is Accounting a good job for the future?
Disclaimer: Above links are affiliate links and at no additional cost to you. I may earn a commission. Know that I only recommend products, tools, services and learning resources I’ve personally used and believe are genuinely helpful and relevant. It is not because of the small commissions I make if you decide to purchase them. Most of all, I would never advocate for buying something that you can’t afford or that you’re not yet ready to implement.
