Importance of Financial Statements

Financial statements are important reports. They show how a business is doing and are very useful internally for a company's stockholders and to its board of directors, its managers and some employees, including labor unions. Externally, they are important to prospective investors, to government agencies responsible for taxing and regulating, to lenders such as banks and credit rating agencies, and to investment analysts and stockbrokers.

Importance of Regularity and Accuracy

All public companies are required to prepare documents showing the company's financial performance at regular periodic intervals. Most companies prepare annual statements; others prepare them semiannually, quarterly or as often as monthly. These show the financial wealth of a company (how much it owes and owns) but can be manipulated. It is often required that statements for external consumption be audited by independent accounting firms.

Parts of Financial Statements

The three basic parts of financial statements are: a balance sheet, which basically lists all of the assets and liabilities of the business at the end of the period, the difference between the two being the company's net worth; a profit-and-loss statement, which answers the question of how the company did from the beginning to the end of the accounting period; and a cash flow statement, which says where the cash of the business went and where it came from during the accounting period.

Importance of Each Part

Among other things, analysis of balance sheets can tell whether the company owes too much or is lending too much or has too much in inventory; its detailed attachments detail who is owed and who owes the company and what properties it owns, if any. Analysis of income statements can tell whether prices or volumes sold are not high enough to give sufficient profits and what the big and small costs of the business are. Analysis of cash flows can tell whether most needs are met through internally generated funds or whether some come from borrowings.

Importance to Managers

Managers of businesses, more than any of the other users, benefit most from the use of financial statements, especially those who are good at understanding and analyzing these statements. Managers are able to not only discover problems and find corrective actions needed through financial statements but they are also able to make projections of these statements that act as goals and standards for upcoming periods. They are then able to assess performances against these projections at the end of the accounting period.

Importance to Others

Current and potential investors and lenders always require financial statements for their lending or investment decisions. In important board and stockholder meetings, copies of these are always given out to participants. Analysts, brokers, rating agencies and money managers dig into these before making recommendations. Major customers and suppliers of businesses ask for these in order to stay informed. Corporate raiders, competitors and potential competitors attempt to get these before plunging into a business.

References

• Making Sense of Financial Statements
• The Importance of Financial Statements
• Financial Statement Analysis