How Do You Do Financial Statement Analysis? [ Importance, How to Create ]

A company’s financial statement is one of the most important documents or tools that a company can have. Since running a business always involves money and investments, a business should have a complete and useful document that contains all the essential financial information of the company. This information allows businesses to determine the present status of the business, whether it is earning revenue and profit or not. A business without a proper financial statement will only cause more problems for the business, especially when a business’s finances aren’t enough to operate and run the business, leaving the company no choice but to shut down.

Financial statements are used for various purposes. It is a document that can be used by investors to help them determine whether a business is financially healthy and if it is good to invest their money in the business. A financial statement can also be used to help a business with auditing. This is why a proper financial statement analysis is essential for the business. This article is useful for you if you want to learn more about the importance of financial statements, including the steps for creating an effective financial statement, and the methods for conducting a financial analysis. You will also find financial statement samples on our website that you can download should you need help in creating one for your business.

Why Are Financial Statements Important?

As a formal record of the finances of the business and the transactions where these finances are incorporated, financial statements can provide a lot of benefits not only to the management and operations but also to the stakeholders of the business. A few reasons why a financial statement is deemed to be important are as follows:

• A financial statement can help assess the current economic standing of the business, which will then help the business identify its position in the market.
• A financial statement can justify the effectiveness and efficiency of the financial activities and programs of the business within a specified time period.
• Financial statements allow the transparent outlining of the financial activities of the business. Hence, there will be a better overview of how the business gets its monetary resources and how these resources are put to use.
• Financial statements help the business to understand the underlying reasons for the changes that have occurred in the financial position of the company. This can involve the factors that specify the effect of economic activities to how the business performs on its current condition.
• A financial statement can serve as the reference of the company’s financial growth, or the lack thereof. Through the creation of financial statements, it will be easier for companies to have a database of the development of their finances through time.

 

How Do You Do Financial Statement Analysis?

It is necessary for any and every business to understand how to effectively analyze their financial statements to make better financial and economic decisions. If you are a financial professional or if you own a business, we have listed below the important steps to developing or creating an effective financial statement analysis for a company or business. The steps are as follows:

Step 1: Thoroughly identify and analyze the economic characteristics of the industry.

• The first step that you should do when conducting a financial statement analysis is to determine the activities of the company in creating, manufacturing, and distributing the different products and services that the business is offering to their clients or customers.

Step 2: Identify the different company strategies that the business has.

• The next step is to identify the qualities of the products and services offered by the business to customers. These include the uniqueness of their products, a number of profit margins, the customer’s brand loyalty, and the cost control. These are some of the factors that are essential in effectively conducting a financial statement analysis.

Step 3: Evaluate the business’s financial statements.

• Now that you have identified the economic characteristics and the different company strategies, review the financial statements of the business. The three essential financial statements of the business include the income statement, the balance sheet, and cash flow statement.

Step 4: Analyze the business’s present profitability and risk.

• This step is the most important aspect of the financial statement analysis. This is where financial professionals can analyze the asset management, the business’s profitability, the company’s debt management, and the valuation risk, which is used to determine if the business’s assets are overvalued or not.

Step 5: Prepare a forecast of the business’s financial statements.

• After the analysis of the business’s financial statements, financial professionals or assessors will then need to set expectations regarding the future of the business. This is where you will outline the results on how these expectations will affect the cash flows and the funding of the company.

 

How to Create an Effective Financial Statement

When creating an effective financing statement that is highly usable and comprehensive, here are the steps that you may consider following:

• Familiarize yourself with the creation of a balance sheet. The assets and liabilities of the business, especially its relationship with each other, play a vital role on how the financial statement will be viewed as a whole. Hence, you need to make sure that you are well aware of this information as they can affect the next steps that you need to implement.
• Make sure that you are aware of the accounting equation that you will use when making a financial statement. Certain rearrangements may be done depending on the report that you need to create, which is why you need to be familiar with the company’s total assets, liabilities, and equity as well as how they have been computed accordingly.
• Ensure that you have a complete and precise list of your assets. Commonly, assets of the business are specified as either fixed or current. Make sure that you will specify the kinds of assets that your business have so it will be easier for you to place them in the financial statement when necessary.
• Put together all the information that you need on a balance sheet. All items should be labeled accordingly for proper assessment. The details present in a balance sheet should also be summed up so you can identify them both as individual details and as a whole.
• Determine the business’s assets and liabilities. It will be best if you will create a record of the company’s liabilities so you can just refer to it when needed. Be specific with the kind of liabilities that your business has acquired through time. This record should be subtracted to the assets of the business to identify the owner’s equity.
• The financial statement that you will make should have the details of the stocks of shareholders. Hence, the shareholder’s equity should be discussed precisely in their respective categories.
• Gross profit should be identified. You can start from knowing the net sales of the business followed by the calculation of the gross profit.
• Once the gross profit has already been identified, the expenses used by the business for its operations should then be known and documented. The net income should then follow for proper recording as well as all the additional expenses of the business that are not related to its operations.
• Since you have gathered all the information that you need, the next thing that you can do is to lay them properly based on the information needed to be presented in a specific financial statement.

 

The steps in making a particular financial statement may vary especially when it comes to the details that the management needs to be aware of in a specific time period. It is very important for you to be knowledgeable first of what the business needs to see in a report before making one so you can directly address their concerns. In addition, other than a financial statement, we also have other types of statement templates like a profit and loss statement, statement of account, income statement, and a sworn statement available for download on our website.