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Tuesday, July 6, 2010

Use Financial Statement as a Management Tool

A financial statement is more than just a snapshot of the business’ health that company provides to shareholders or potential investors. It’s also a powerful diagnostic tool business owners can use to evaluate their firm’s strengths and weaknesses and chart the way forward.

This article will brief how to craft a balance sheet, income and cash flow statement, guiding you through the criteria and terminology, demonstrating how to calculate the ratios that reveal company’s fiscal health and its standing among the competition.

A brief explanation of the three statements

Balance sheet: The balance sheet is often described as a snapshot of a company’s performance at a given time, such as the end of a quarter or fiscal year. The balance sheet identifies company’s assets and liabilities -- divided into near- and long-term obligations -- and stockholders’ equity.

Income statement: Also known as a profit-and-loss statement, the income statement summarizes a company’s revenue and expenses for a given time period.

Cash flow statement: This records the amounts of cash and cash equivalents that flowed into and out of a company in a given period. It is used to measure how much cash a company has on hand, which influences its ability to pay suppliers and employees and to meet other near-term obligations.

While evaluating company's performance, financial analysts need to look at various parameters and study different ratios derived from above statements which in turns help them to analyze the health of a company in all aspects.