In a clear and concise manner, financial statements present the financial activities and health of the business. Balance sheet, income statements, cash flow statements, and statement of retained earnings are included in an organized manner. As required by accounting standards that are used, further disclosures are made as per relevant laws and regulations, however. To become more useful to various stakeholders, financial statements record all the financial data of the business when evaluated and critically analyzed. With the right financial statement preparation that ensures accurate, reliable and relevant financial data, there are many benefits business owners can count on and we at Mark Dicus & Company would like to share these advantages today.
Advantages of Financial Statement Preparation for Analysis
While the income statement shows the incomes and expenses incurred during the period, a balance sheet provides a summary of the position of the business at a particular date. Within the business, a cash flow statement shows movement. Especially clearly knowing each element like revenues, expenses, assets, liabilities and equity, via the use of these statements, stakeholders can understand and assess the entity’s financial performance and positions. The advantages for meticulous financial statement preparation are listed below.
1) Cash Flow Review. The ability of the company to pay liabilities is shown by the financial solvency. Breaking the statement into operating, investing and financial parts, the statement of cash flow review helps you understand whether the business is operating under a cyclical revenue stream structure or consistent revenue model. Also, it maintains the expenditure of business inline within the revenue model it operates in.
2) Liability Review. The short- and long-term obligations of the business are presented with financial statements. The owner must look at the statements of financial position and deduce the logic as to whether the business should reduce existing liabilities to apply for further capital expansion in the event the owner wants to expand his business. To determine the prospect of business on the basis of revenues, assets and liabilities, lenders will review the financial statements.
3) Movement & Review of Inventory Stock. The ability and nature of goods of the business is shown through the levels of opening and closing stock as a percentage of purchase and sales along with the changes and movements in the levels of stock throughout the year shows. Fast-moving or slow-moving or change in the trend of sales and so on is shown whether the goods are in demand. It is considered as a negative for the business prospect and growth when the goods are slow-moving as compared to industry.
4) Trend Identification. To identify the trend in business, the business owner should prepare and compare financial statements over various periods. Which segments are growing well and which segment of business needs further review and re-investment or complete exit at once are determined through knowing what products are selling well. The performance of the business is identified with the trends, thus making it a necessity for the business to sustain the growth and achieve higher profits.
5) Budget Preparation. Having a vision, business preparation vision provides a definition of business goals and objectives. By analyzing the past financial statements already prepared and audited, the objective of financial statements is to prepare a blueprint for the future. To keep the expenses in line with income, budgeting helps. Using prepared financial statements, the budgets are forecasted.