Financial Information Analysis and Their Role in Strategic Decision Making
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By John Alexander Adam
The upper management of any business are tasked with the responsibility to take the decisions which will enable to company to achieve the best financial results possible in the context of the external environment. They have to make judgement calls on how to achieve the best balance between the company’s costs, running and capital investment, and the income and profit that it can achieve as the result of these costs. It’s a careful and often complex balancing act and involves taking into account factors they can be sure of as well as anticipating potential changes to internal and external influences that they can’t be sure of.
Every business has three primary financial statements: the Balance Sheet, the Cash-flow Statement and the Income Statement. The information within these statements is entirely quantitative and neutral. While different kinds of business operate according to different principles, the management of those businesses draw objective information from its financial statements. Based upon the general principles that apply to the particular business, such as operating cash-flow requirements, management can come to the conclusion as to whether the business is in need of a cash flow injection and needs to borrow, or is in a position to be able to make investments.
The Balance Sheet
A balance sheet lists all of a company’s assets and liabilities side by side and will include liquid assets such as cash in the bank account, money owed to the company and fixed assets owned such as property, machinery and company cars. It will also list liabilities such as salary expenses, bank loans, outstanding sums owed to suppliers and so on.
The information contained with a balance sheet can give a good business manager valuable insights into how the company’s performance could be optimised. For example, company policy may be that clients are given six weeks to settle their invoices. If the company’s annual sales amount to a total of $100, 000 million, reducing the grace period for invoices to be settled within to 30 days would shift $4 million from accounts receivable into cash in the bank account. That $4 million could be put to work as operating capital that could help the company grow without any change to overall income generated from sales.
Cash Flow Statement
A company can look like it is generally profitable based on its balance sheet and other standard accountancy methods. However, a company that theoretically makes more money that its overall costs but doesn’t have cash in the bank to cover operating costs will not last long. It’s no use having $1 million in revenue due to come in after 3 months if you have $200,000 in the bank now and operating expenses of $400,000 over the next 3 months. Managers need the information available in the cash-flow statement to be able to make decisions such as the need to reduce operating overheads, inventory, debt, reassess credit facilities available to clients and so on.
The Income Statement
A company’s income statement shows what its forecast profitability is over a particular period into the future. In some ways it is more detailed than the cash-flow statement in that it takes into consideration subtleties such as value amortization of fixed assets and depreciation. However, it does not provide detail on specific dates when income will be received and expenses due, grouping income and expenditure together over quarters or a full financial year. The information contained in the income statement is used by management in macro decision making such as managing overall levels of operating costs and adjusting profit margins as required.
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