Here’s a classic situation: the financial reports indicate profit, yet the reality shows that the cashier and the current accounts are empty. Only high-quality, reliable and timely financial reports help to understand the real state of affairs.
The financial statements provide you with the information that is the source of the decision making at the investment stage, in the operational phase and in case you intend to sell the business.
The ability to read and understand financial statements allows you to know the actual financial condition of the company, diagnose the actual situation, make decisions and act correctly. The head of the entity needs to control the financial situation to ensure the current and future development of the company. If you have a basic knowledge of understanding the figures that reflect the company’s finances, you can answer many questions and have the ability to ask the finance and/or accounting department the correct and appropriate questions.
The main information you get with the Financial Statements
The financial statements contain numerous and various indicators that can be used in the decision-making process. Below, you will find the main information provided in the Financial Statements.
- Balance Sheet – reflects the patrimonial state of the company. Based on this, you can assess what capital you have invested, what assets you hold and what are the external sources of financing. You have the basis for the dynamic and structural analysis of assets and financing.
- Profit and loss account – mainly reflects the financial situation or the results obtained due to the investment;
- Cash flow statement – allows analyzing and forecasting of cash, including anticipation of liquidity crisis.
The analysis of these indicators, for the most part, offers the possibility to form a certain perception about the situation of the company. Once you learn the tendency to periodically analyze these indicators, you will be able to draw conclusions about the evolving dynamics of the company you manage.
Key financial efficiency indicators
It is often not enough to analyze the dynamics and absolute numbers. Efficiency indicators (effort versus effect) provide much more accurate information, such as:
- Gross profit margin;
- Net profit margin;
- Return on assets;
- Return on equity;
- Financial leverage;
- EBIDTA etc.
The calculation of efficiency indicators does not express the quantity, but the quality of the company’s financial performance. They allow making correct and timely decisions, based on economic reality, thus establishing the financial diagnosis of the entity.
Bottom line
The preparation of the Financial Statements can only bring the maximum contribution if these reports are fully and objectively analyzed. This is the situation, in which you should be able to read and analyze financial statements. During the training provided by Vioser, we offer efficient methods for analyzing the Financial Statements that certainly offer business managers a new vision on this type of reporting.
At Vioser, we offer training, consulting and explanations in a language that is both accessible and professional, so that entrepreneurs are able to independently analyze business figures and make decisions based on them to ensure sustainable, efficient and effective development, as well as control the management of financial risks of the company.
