INTRODUCTION
Business
owners and financial managers must be able to properly “read” and interpret all
financial statement, which are prime importance to every business organization.
Accurate and comprehensive
maintenance of the book keeping system facilities timely preparation of
financial statements. These statements consist of three important documents
namely: - Balance sheet, income statement and statement of cash flows.
1.
What Are Financial Statements?
Financial
statements are documents showing the financial position of a company. The four main statements are the balance sheet,
income statement, cash flow statement, and statement of retained earnings (or
shareholders’ equity).
2. What Is the Meaning of Financial
Statement Analysis?
Companies conduct financial statement analysis to
understand their financial health during the statement period. By using these
statements wisely, an individual can gauge the company’s present financial scenario,
as well as make projections for the immediate future. The company also makes
extensive use of financial ratios and graphs. With this, one understands the
relation between the company’s assets and its productivity. Financial statement
analysis is extremely beneficial for the company’s management, its
shareholders, its creditors and the government.
* Management’s Perspective
The company prepares its fiiancia1 statements at the
end of every quarter and year. Once, these are prepared, the management gets a
fair idea on its business performance during the period. It knows of its
assets, cash and equity position at the end of the period. On the basis of
these, it is then able to make its future decisions. It knows how much it has
to spare and what are the assets that it requires to purchase most urgently.
Also, the company can, after analyzing its financial ratios, take measures to
increase its profitability.
* Equity holder’s perspective
* Equity holder’s perspective
Analyzing
financial statement, an individual is able to understand whether or not he must
invest his money in the company’s shares. Only when the preposition
looks profitable in the long run, will an individual plow his money.
Also,
a present investor knows whether or not s11 must continue to retain her money
in the company. She makes this decision based on the direction of share
price movements. In case, the prices show an upward movement trend, the
investor decides to keep the investment. In case, the prices have been falling
lately, the investor decides to withdraw her money.
* Creditor’s perspective
Just as in the case of shareholders; financial
statement analysis helps in reassuring the present creditors that their money
is safe. They too can take their future decisions accordingly. Prospective
creditors, by looking at financial statements, get a feel of the business. They
use “comparative financial statements” to see the company’s growth path over
different periods of time. This way they can determine whether or not the
company’s vision aligns with their own.
* Governmental Perspective
A company’s financial statement analysis is very
helpful to the company. The government is able to calculate the taxes owed by
the company. Also, it has a mechanism in place to check if the organization is
projecting its finances correctly to the external world.
Why Financial Analysis Is Needed
Numbers on financial statements can be confusing.
Analysis of the numbers gives you or outside investors a better perspective of
how your company is managing
money and operations.
Ratio Analysis Example
A basic example is the current ratio which helps a
business know whether it has enough resources to pay its debts. By dividing
current assets by current liabilities from the ba1ance sheet, you can determine
whether you have sufficient resources available
or if you need additional money to pay upcoming bills.
Interpreting Financial Statement Analysis
Financial statement ratios must be considered in the
context of industry standards. Ratios should be compared to benchmarks of
similar businesses to determine a company’s overall financial health.
Objective of financial statement by
business owners
1. The
objective of financial statement is to provide information about the financial
position, performance and changes in financial position of an enterprise that
is useful to a wild range of users in making economic decisions.
2. Financial
statement should be understandable, relevant, reliable and comparable.
3. Report
assets, liabilities, equality, income and expenses are directly related to a
business financial position.
4. Financial
statements are intended to be under stable by readers who have a reasonable
knowledge of business ad economic activities.
5. Owners
and managers, required financial statements to make important decisions that
affect it continued operations.
6. Medical
and general public are also interested in financial statements for a variety of
reasons.
Financial Statement Analysis for Small
As a small-business owner, your financial statements
provide you with valuable information about the financial well being c :your
company. The process of compiling financial statements on a regular basis
provides your company with the tools to evaluate your past performance and
adapt to changing circumstances. In addition, the process of creating financial
statements presents the opportunity to set goals and evaluate your progress
relative to short-term and long-term objectives.
Income Statements.
Income statement: - This provides information about a company’s profitability i.e. the
excess of its revenues over it expenses during a specific period.
Income statements provide information about how much
your company has earned during the period in question by listing your various
sources of income as well as your various categories of expenditures. By
showing you how much you have earned, your income statement provides you with
tools to assess whether your company’s earnings are sufficient to cover its
expenses and also to meet your own financial needs. In addition, your income
statement provides data about how your income is distributed relative to
different businesses, activities, such as wholesale and retail sales.
Balance Sheets
Balance Sheet: - Provides information about a company’s excess of its assets over its
liabilities at a specific moment of time.
Your balance sheet provides information about your
overall financial wellbeing. A balance sheet is a snapshot listing your assets
and liabilities on the particular day when it is compiled. It breaks down your
assets into categories such as cash on hand, money owed to you and property you
own. Examining this information can help you to assess whether you have enough
in liquid assets, or money that is readily available when you need it. Your balance sheet also breaks down your
liabilities into different types of debt such as accounts payable and credit
card debt. This information allows you to evaluate whether your debt load is
sustainable, and whether your interest burden is too high.
Companies conduct financial statement analysis to
understand their financial health during the statement period. By using these
statements wisely, an individual can gauge the company’s present financial
scenario, as well as make projections for the immediate future. The company
also makes extensive use of financial ratios and graphs. With this, one
understands the relation between the company’s assets and its productivity.
Financial statement analysis is extremely beneficial for the company’s
management, its shareholders, its creditors and the government.
Cash Flow Projections
Statement of cash flows: - Provides information of a company’s liquidity i.e.,
the excess of its available and incoming funds over its outgoing funds during a
specific period. A cash flow projection is a forecast of your company’s
financial activity during expect coming in with the sums you anticipate spending.
By creating a detailed and realistic cash flow projection, you allow yourself to
plan for shortfalls as well as busy periods, identifying times wren you will
need extra cash and figuring out how you will obtain the necessary capital.
Goals
Your company can either set concrete, numerical goals
or more subjective objectives
such as becoming a learning organization. Your financial statements provide
direct information about whether or not you are meeting quantifiable goals such
as increasing your sales by 50 percent over the next two years. Although your
financial statements cannot provide direct evidence about whether or not your
company is becoming a learning organization, they can help you identify trends
that might interfere with your company’s learning potential, such as a
trajectory of increasing debt
REFERENCES
SEC Guide To Financial
Statement
Noobpreneuer.com importance
of financial knowledge