The Role of Financial Statements in Business Decision Making

Financial Statements play a vital role for businesses to keep track of their operations. It provides a snapshot of the business and analyses its financial health. These statements are very useful for investors, shareholders, stakeholders and executives for decision making as it gives a complete overview of the business. As said by the famous ‘Father of Accounting’, Luca Pacioli:

“Financial statements are like a puzzle, and accountants are the ones who put the pieces together. They provide transparency and help investors understand the true value of a company.”

In simple terms, financial statements are necessary for the business world to function as it does today.

What is a ‘Financial Statement’?

Financial statements are essential tools firms use to monitor and give information about their overall financial performance and health. The flow of transactions and economic activity produced by business operations over time are recorded, summarised, and reported in the financial statements.

Following are the types of Financial Statements:

• Income Statement

Income Statement gives detail on revenue, expenses, profitability and losses. An income statement is a document a business creates to explain how much money it has made over time. They frequently appear in yearly and quarterly accounts. The profit and loss (P&L) statement is another name for it.

• Balance Sheet 

The relationship between a company’s assets, liabilities, and shareholder’s equity at a certain period can be seen on a balance sheet. A balance sheet lists what the business owes and owns.

• Cash Flow Statement

Cash flow measures how much money a company earns or spends overall during a given period. The ability of the company to create cash flow from operations, investments, or financing is revealed by the cash flow statement.

Importance of Financial Statements in Business Decision-Making in Canada

Periodic financial reports are an essential part of operating a business and must be produced and published by any business in Canada.

Providing this overview to internal and external entities, including the Canada Revenue Agency, investors, stakeholders, and creditors, is the goal of financial reporting.

Here are some of the stakeholders that the financial statement will have an impact.

Attracting Potential Investors

If investors want to invest in a specific company, they must be given access to its internal financials. As a result, one of the primary purposes of financial statements is to show where a firm stands concerning its industry and market for potential future growth and investment opportunities.

Investors view a firm’s financial reports as an overview of its performance at any particular period. They use these statements to understand the present financial situation. Additionally, the information in these statements helps investors do competitive analysis, revenue-generating potential and cash flow estimates.

Persuading Creditors to Lend

For creditors, financial accounting plays an essential role as well. Creditors and lenders will review a business’s financial reports to decide how reliable they would be in paying the money back. These documents display all the facts required to obtain a loan and must be available to the public.

A lending institution must understand the level of risk involved before making a loan to a business; this can be done by studying the company’s financial accounts. Once the level of risk has been determined, the lender can decide on how much money to lend and at what interest rates during the loan application process.

Profitability Analysis

It should go without saying that a complete analysis of profit is essential in understanding how well your business is doing. However, details that cover various financial figures will show you the actual image of your company’s profitability.

 You may monitor your company’s performance by assessing the earnings, which are the cash left over from the capital after deducting all operating expenses. Maximising profits is made possible through profitability analysis for businesses.

 As a result, businesses can maximise their chances to profit from them to continue expanding in a significantly evolving, competitive, and active market. Businesses can find growth prospects, inventory items with high or low turnover, market trends, and more with the help of profitability analysis, which eventually gives decision-makers a clearer picture of the business.

Planning and Budgeting

Making a budget is vital for running a profitable business. When setting prices, restocking inventory, developing marketing strategies, and allocating funds for new equipment investments, business owners may keep track of their progress and give financial goals the attention they deserve by using budget reports.

Budget reports offer a practical plan that influences future investing and spending choices for a given period. Most businesses create annual budgets, but quarterly reports might be helpful if the organisation is developing and growing.

A well-informed business planning projects future profit or loss by considering past spending patterns and revenue-generating trends. With this knowledge, business owners could look into opportunities for saving to support expansion or create capital reserve accounts.

Managing Cash Flow

Cash flow plays the role of lifeblood for any business were channel congestion can negatively impact financial stability. Monitoring and exercising control over the amount of money that comes into and goes out of an organisation are the two primary principles of cash flow management. The overall objective of cash flow management is to accurately forecast the financial needs of an organisation in the future.

It is the routine practice of monitoring, assessing, and optimising daily net cash receipts, less expenses. The goal is to effectively manage your company’s finances in such a way that there is sufficient money for the company to expand.

The amount of money available to pay for expenses like debt, wages, and vendor invoices can be predicted using effective cash management procedures.

Benchmarking

By assessing financial data against those of other organisations, financial benchmarking develops a base for comparison. It involves collecting and analysing internal and external data, including ratios particular to the industry, costs, and profits. Your benchmarking financial analysis’s effectiveness is determined by the format as well as the type and quality of the data. Strategic decision-making is made possible by a well-designed report that tells a financial story.

Customers receive value when reliable benchmark performance data is presented in an approachable way, enabling them to figure out their strengths and weaknesses. Financial benchmarking helps clients generate Revenue, reduce risks, and identify opportunities. As a result, financial benchmarks have become essential for making decisions, and providing them to your clients will give your business a competitive advantage.

Conclusion

A company’s financial statement is a valuable source of knowledge about the crucial elements contributing to its success. This information aids in the timely decision-making necessary to maintain the financial stability of your company.

When making decisions, one should always consider the positive and harmful effects on the business and lean towards favourable results. As a result, potential losses to the organisation are avoided, and the business continues to grow steadily.