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How To Analyze Financial Statements
By plrprousers | September 28, 2009
A frustrated man sent this desperate but funny letter to a utility company: “In reply to your request to send a check for my bills, I wish to inform you that the present condition of my bank account makes it almost impossible.The business is run in such a way that it’s hard to know who owns it. I am inspected, expected, rejected, examined, reexamined, informed, required, and summoned until I provide an inexhaustible supply of money for every known need of the human race.The grounds in which I want to go on living is to know what happens next.I now have money to give you b ecause the wolf that circles my door just had pups and I sold them for you.” If the man only knew how to get a fast cash loan, his financial emergency would have been easily solved!
People should always have control over their finances, particularly those who are dealing with large sums of money, like business owners and entrepreneurs. Even if there are accountants to do most of the heavy lifting, in terms of balancing the books, people must have a hand in monitoring and analyzing the financial information available for an efficient control over their personal or business financial health. For businesses, even if there is an accounting system in place, it should be common practice to analyze the financial statements available to give a firsthand idea where the business is heading.Business people must scrutinize the data on profit margins. A decreasing profit margin means two things: an increasing inventory and accounts receivable or skyrocketing expenses. Or, both—which is doubly unfortunate since a dwindling profits sends a dire signal that the business is struggling to survive, and when this happens, the business people may need to apply for fast loans in order to infuse more capital to keep the business afloat.
Biz owners, entrepreneurs, and even managers and supervisors can do simple financial analysis when need be. The key is the correct reading and interpretations of financial statements generated by accountants or the accounting system. One common way is computing ratios.Ratio analysis is when one interprets a relationship between two numbers in a financial statement.Financial information can sometimes confuse the average Joe but he only has to study these: liquidity ratios, leverage ratios, and profitability ratios. Under the liquidity ratio is the current ratio, which measures the ability of the business to pay its suppliers.The level of financial risk the business passes through is interpreted by the leverage ratio. Financial ratios are useful tools for evaluating business performances, but these are not enough. People should recognize which ratio is important to their financial health.
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