Financial Statements Importance
Financial Statements
Similar to the lab results we get when we go to our doctor, Financial Statements indicate the health of a business. Data found in the financial statements is used to calculate important financial ratios and analyses that provide insight to the company’s financial performance and potential problems that may need to be addressed. Each of the Financial Statements provide unique details with information that is all interconnected. Together the statements give a comprehensive portrayal of a company’s operating activities.
In order to run a business and know what, where, and when to take corrective actions requires business information. How do you get and where do you find this information ? You don't if you don't keep accurate and current records about your business financial activities
As stated earlier, Financial Statements provide users with a report on the financial health of a business. Because of this, they can serve more than one purpose based on the needs of different users.
- Provide users with the information they need for their decision-making processes
- Provide users the data required to calculate financial ratios and analyses that provide reliable measures of a business's financial performance
- Provide government agencies with the information needed for taxation and compliance with laws and regulations
Examples Of Questions where financial information helps managers and owners:
- Am I making a profit or incurring a loss ?
- Are my selling prices and margins adequate ?
- Are my sales increasing without lowering selling prices ?
- Should I offer an early payment discount ?
- Am I carrying too much inventory ?
- What's my breakeven ?
- Are my customers paying on time ?
- Should I consider getting rid of some customers ?
- Am I paying my suppliers on time ?
- Should I consider acquiring new or getting rid of current suppliers ?
- Is my cash flow adequate ?
- How do I compare to my competitors ?
- Am I paying reasonable salaries & wages ?
- Are my operating expenses reasonable ?
- Should I add new products and services or discontinue some current products and services ?
- Should I invest in newer equipment ?
- Should I open a new or close a current facility (store,plant,etc.) ?
- Am I carrying too much debt ?
Financial Statements & Analyses are a business's report cards.
How do you know if a business deserves an A or an F ? Comparisons to past performance, budgets and standards, "rules of thumb", and industry guides provide us with benchmarks.
What are the the Formal Financial Statements ?