Tracking financial performance helps keep business owners and the country running and organized in the right direction.
Mainly there are FOUR Basic Financial Statements –
- Balance sheet
- Income statement
- Cash flow statement
- Statement of Owner’s Equity
These financial reports monitor earnings and help ensure that the business is financially sound. It determines how the business continues to do business and is able to meet its operational objectives.
Otherwise, a company may run out of cash, default on loans, or become over-leveraged if financial reports and statements are not up to date.
Article Content-
- What Is a Financial Statement: Know Its Importance
- Why Is Comparing Financial Statements from Previous Years
- Methods of Financial Statement Analysis
- Benefits of Accurate Financial Statement Analysis
- Frequently Asked Questions (FAQs) on Financial Statements
- Conclusion
What Is a Financial Statement: Know Its Importance
Financial statements are included in an annual report that summarizes a company’s financial performance over a specified reporting period.
The financial statement typically has three sections. These include –
- Assets
- Liabilities
- Equity
Financial statements are primarily significant and essential to the company’s management, Shareholders, creditors and lenders, employees, and the government. Thus, it must be accurate. It reflects the company’s business performance and financial position. Also, it evaluates the business status and makes economic decisions by comparing past and current business performance.
As a result, the financial statements aid in predicting the company’s future growth and performance.
Why Is Comparing Financial Statements from Previous Years
Trend Analysis
One of the most significant benefits of comparing financial statements over time is discovering trends and analyzing the findings.
You can develop an explanation for the change and quickly spot positive or negative trends in the business. The same holds true for accounts for inventories, accounts receivable, and other crucial factors on standard financial statements.
In this manner, comparing financial statements spanning more than a year improves trend analysis. Additionally, it aids in predicting upcoming operational activities for effective management.
Business Performance Evaluation
Business managers can evaluate organizational and departmental performance using financial statements. Business heads can assess operational effectiveness and modify their management plans by analyzing the root cause and the percentage rise/decrease in costs and sales.
This way, all stakeholders can identify whether performance is improving or declining by comparing statements from multiple years.
Identify Accounting Discrepancies
Comparing multiple years’ financial reports also helps to identify errors. Also, you can get discrepancies like omissions or misreporting in financial statements.
You can identify that ratio and percentage of the inconsistency and plan it according to actual operating activity. This way, you will determine the root cause of the change.
Strategic Decision-Making for future
The primary purpose of comparing financial statements from the previous year is to make strategic decisions. If you identify that your business cash flow is unstable, you can identify the trend and adjust operations to meet the challenges the organization faces using financial statement analysis.
Similarly, if revenues are rising and inventories are falling year-over-year, business owners get help by comparing the financial year statements.
Therefore, financial records assist management in making decisions that will eventually determine the growth or fall of their organization.
Cash Flow Review
By comparing financial statements, you can quickly analyze your cash flow. You can easily know how much money came in/out in the last year and plan to maximize the cash flow. It refers to a company’s financial solvency to pay its liabilities at any time.
Company Liability Review
Existing liabilities are displayed in the financial statements. These include commercial loans, credit lines, credit cards, and vendor credit. Looking at the financial statements, By analyzing and comparing them, you can know what liabilities have been on your business in the previous year and how you can overcome them.
Review Assets and Inventory
A component of the financial statement is the balance sheet. The balance sheet contains assets. Business owners can better prepare for the approaching months of sales by examining if there is too much or too little inventory.
Methods of Financial Statement Analysis
Financial statement analysis can be conducted using-
- Horizontal analysis
- Vertical analysis
- Ratio-based analysis
- Statement of Owner’s Equity
Horizontal analysis – Involves comparing financial information over a series of reported periods, with a base year being chosen as a starting point for future comparison.
Vertical analysis– Involves a proportional analysis of a financial statement.
Ratio-based analysis– Used to calculate the relative size of one figure in relation to another. It has four categories-
- Liquidity ratios: Measure a company’s ability to continue doing business
- Activity ratios: Measure management’s quality and performance
- Leverage ratios: Measure a company’s reliance on debt to finance operations
- Profitability ratios: Measure a company’s ability to generate profit
Benefits of Accurate Financial Statement Analysis
- Proffers Financial Transparency
- Accurate Tax Liability Evaluation
- Determine Profit Margins
- Determine Debt To Equity
- Analyze Improvements Over Time
- Track Inventory
- Error Mitigation
- Trust Building
Frequently Asked Questions (FAQs) on Financial Statements
Do Financial Statements Essential for the Financial Health of a Company?
YES. Financial statements are significant. They are a valuable source of information regarding a company’s financial situation. This way, it assists businesses in deciding whether or not to invest in particular business functions.
How Can I Make Financial Statements?
It is best to integrate business with an accounting software that helps business to prepare financial statements. This will ensure everything is prepared accurately.
Who Benefits from Financial Statements?
Financial Statements help all stakeholders, including management, investors, financial analysts, etc. It evaluates and makes suitable economic decisions by comparing past and current performance
Why do businesses use financial statements?
Businesses get the following benefits from the financial statements- Measures year-wise impact
Determine budget for present and future
Cut Unnecessary Costs involve in business
Align business and its department
Conclusion
The growth of any business depends on an accurate and timely analysis of financial statements. Your organization’s financial statements are valuable assets that you can use to make strategic decisions and manage your team, inventory and business.
If you’re unsure where to start, leave your financial accounting to SWIL Accounting Software. Integration with SWIL software will provide your business with excellent accounting and quick tracking and analyzing of your financial statements.
So book a SWIL demo today to enhance your financial knowledge and enable you to make the best use of the resources available to you and become a finance-driven manager.
