Significance of Analysis of Financial Statements (2024)

A financial statement of any entity is the annual report of the previous year from 1st January to 31st December on the expenditure, breakdown of income, either increasing or decreasing assets, and itemised balanced sheet. The collection or submission of this report occurs at the end of March. There is a huge significance of these statements in business as it tells us the complete record of projects, budgets, and all other finance-related transactions. With this information, we can determine the profitability of the entity and also conclude whether the given entity is investable or not. The analysis of these financial reports helps the finance manager to assess the managerial and operational efficiency of the company. The analysis is not restricted to a single person. External parties like bankers, owners, investors, government, and others can also analyse the reports to get their decision on the company.

Objectives of Financial Statement Analysis

The main objectives of financial statement analysis of any given entity are as follows:

• To review the company’s performance over the past years. This review helps in deciding whether to invest in the company. The analysis is done by examining the trend of past sales, debt-equity structure, profitability, cash flows, return on investment, and operating expenses.
• To examine the current status of the company, i.e., to find the operating performance and earning capacity of the company.
• To predict the future profitability of the company by analysing its financial statement. We can find the probability of failure of the company or bankruptcy by analysing these reports.
• The analysis of these statements helps the bank and authorities to decide on giving the loan to the company by determining the credit risk.

Significance of Financial Statements

• For Finance Manager: A finance manager assesses and analyses the financial statements to understand the managerial effectiveness and operational efficiency of the company. This statement also helps them analyse the financial strength and weakness of the particular entity. A finance manager analyses the position of the entity and the types of assets owned by it. They also easily determine the liabilities and the current cash positions of the company. They calculate the debts of the company as well. After all these analyses, the finance manager can take a proper and adequate decision for the company.
• For Top Management: The analysis of the financial statement is crucial for the top management of the company. The financial analysis helps them understand the best use of available resources by the firm, the financial condition of the firm, and the determination of the company’s success. They can also conclude the individual’s performance and evaluate the internal control of the system.
• For Trade Payables: The analysis of financial statements helps the trade payables to determine the company’s capability to fulfil the short- and long-term obligations. It also helps in the determination of the company to meet any short-term debts and other claims of creditors over a brief period.
• For Lenders: The lenders or the long-term suppliers of the firm analyse these financial statements concerning the firm’s long-term solvency and survival in the future. They help in the determination of the company’s ability to generate cash to clear the interest and principal amount, and also in determining its experience to generate the probability of the future success rate. These statements help the lenders to also determine the credit risk and loan if sanctioned to the firm or company.
• For Labour Unions: Labour Unions analyse the financial statement to conclude whether they can apply for an increase in their wages according to the company’s profitability. They may also assess if the firm can elevate the productivity or the price of their services to absorb their increment in wages.
• For Investors: To ensure the profitability and security of the invested money, the investors require the annual report of the company to analyse any bankruptcy or failure to fulfil debts. In case of such mishappening, the investors shall take different measures to prevent loss. They may help the company in paying off its debts.

Conclusion

A financial statement is the annual report of any company or firm to be submitted online at the webform by the end of March. This analysis has great significance in determining the complete record of budgets, projects, and other transactions related to finance. With all this information, we can determine the profitability of the entity. The main objective of these statements shall be to review the company’s performance over the past years. This review helps in the decision of investing in the company. The financial statements are of great significance to the finance manager and top management. These statements help analyse and evaluate the company’s operational efficiency and managerial effectiveness and understand the firm’s best use of available resources.