If you are a company, you will probably know how difficult it is to maintain a sound financial image. On various fronts, a business seeks help from third parties. These third parties are essentially some credit institutions, rating agencies, or banking & non-banking institutions. When a company needs funds, it approaches these people for fulfilling its requirements. The first and foremost thing done by these third parties is- analysis of financial statements. Excellent and precise data on the financial health of the firm can make things very easy and smooth.
Mainly, when we look at creditors’ viewpoint, they are the most interested people in the firm’s financial health. It is because they have their precious money invested in the company. Income, current debt commitments, expenditures, wages, benefit, and cash flow are all factors in a company’s overall financial profile. Creditors do an in-depth analysis of financial statements to decide if a company is an acceptable credit risk and repay it on time.
Financial statements provide an overview of a company’s financial health at a given point in time, revealing information about its performance, operations, cash flow, and overall situation. Shareholders rely on them to make well-informed decisions about their equity investments, especially when voting on corporate matters.
Banks use specific credit scores to test loan applications. Lenders who are considering providing a loan to a company use several ratios derived from financial statements analysis. These financial ratios can give a lender essential details about a company’s ability to repay a loan.
Shareholders have several resources at their disposal to make these equity assessments. They need to assess their stocks using a range of measurements rather than just a few to make better decisions. Profitability ratios, liquidity ratios, debt ratios, productivity ratios, and price ratios are only a few of the metrics accessible.
More than a business plan and financial details are expected when a company approaches a financial institution for a loan. Before agreeing to lend money to a company, a commercial lender looks into several factors. A lender will approve a business’ request for funding if it achieves specific scores in a number of these regions, referred to as ratios. Coming back, it requires the analysis of financial statements. If a company wishes to avoid being caught off guard, it should measure these ratios before approaching a lender. The company will then make improvements before involving a financial institution if anything has to be done.
The accounting process does not conclude with the preparation of final reports. The study of these final accounts comes next. Let’s find out more about them.
Analysis of financial statements is evaluating and analyzing a company’s financial information to make informed economic decisions. In other terms, defining the strategic relationship between the balance sheet’s products, profit and loss account, and other financial statements to determine the entity’s financial strengths and weaknesses.
The word “analysis” refers to the systematic classification of financial data in financial statements, while “interpretation” refers to “explaining the purpose and importance of the simplified data.” Both study and perception, on the other hand, are intertwined and mutually beneficial.
Why you need a sound analysis of financial statements:
- Financial statement analysis aids the finance manager in determining the company’s organizational performance and managerial effectiveness.
- Analyzing the company’s financial strengths and weaknesses, as well as its creditworthiness.
- Taking a look at the current picture of financial analysis provides a better view
- Identifying the different types of properties that a company owns and the obligations that the company owes.
- Providing statistics on the company’s financial situation and the amount of debt it has about its equity.
- Examining the company’s stock and debtors for reasonableness.
Trade Receivables
Analysis of Financial statements is required by trade payables for:
- assessing the company’s willingness to fulfil its short-term commitments
- Considering the likelihood of a company’s ability to meet all of its financial obligations in the future.
- The firm’s ability to satisfy creditors’ claims in a limited period.
- Taking a look at the economic situation and willingness to pay off the debts.
Financial Institutions
- Long-term debt providers are worried about the firm’s long-term viability and solvency. They examine the financial statements of the company.
- To determine the company’s profitability over some time, they prefer the analysis of financial statements.
- To assess a company’s ability to generate cash, pay interest, and repay the principal sum owed to it.
- To evaluate the relationship between different funding sources (i.e. capital structure).
- Evaluate financial statements that provide information on previous results and interpret it as a basis for predicting future return and risk assessment rates.
- To determine credit risk and the terms and conditions of a loan, such as interest rate and maturity date, if one is approved.
Investors value analysis of financial statements because they can reveal a great deal about a company’s income, expenditures, performance, debt burden, and willingness to fulfil short- and long-term financial obligations.
