Financial Statements Work For You

A frustrated man sent this desperate but funny letter to a utility company: “In reply to your request to send a check for my bills, I wish to inform you that the present condition of my bank account makes it almost impossible.My business is organized in such a way that I don’t know who owns it.  I am inspected, expected, rejected, examined, reexamined, informed, required, and summoned until I provide an inexhaustible supply of money for every known need of the human race.The grounds in which I want to go on living is to know what happens next.  The wolf that comes to many doors nowadays just had pups in my kitchen: I sold them and here is the money.”  If the man only knew how to get a fast cash loan, his financial emergency would have been easily solved!

People should always have control over their finances, particularly those who are dealing with large sums of money, like business owners and entrepreneurs.  Even if there are accountants to do most of the heavy lifting, in terms of balancing the books, people must have a hand in monitoring and analyzing the financial information available for an efficient control over their personal or business financial health.  For businesses, even if there is an accounting system in place, it should be common practice to analyze the financial statements available to give a firsthand idea where the business is heading.Profit margins should be closely monitored by biz owners and entrepreneurs.  A decreasing profit margin means two things: an increasing inventory and accounts receivable or skyrocketing expenses.  Or, both—which is doubly unfortunate since a dwindling profits sends a dire signal that the business is struggling to survive, and when this happens, the business people may need to apply for fast loans in order to infuse more capital to keep the business afloat.

Biz owners, entrepreneurs, and even managers and supervisors can do simple financial analysis when need be.  The key is the correct reading and interpretations of financial statements generated by accountants or the accounting system.  One common way is computing ratios.  In simple terms, ratio analysis is drawing out a relationship between two numbers in a financial statement.Financial information can sometimes confuse the average Joe but he only has to study these: liquidity ratios, leverage ratios, and profitability ratios.  Under the liquidity ratio is the current ratio, which measures the ability of the business to pay its suppliers.The leverage ratio is a great tool to analyze a business’ level of financial risk.  Financial ratios are useful tools for evaluating business performances, but these are not enough.  People should recognize which ratio is important to their financial health.

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