What is the Purpose of Financial Statements Analysis? And, why you need them on a regular, cyclical basis for maintaining financial fitness.

The purpose of financial statements is to provide pertinent information on the financial position (Balance Sheet), profitability (Income Statement) and operating, investing, and financing activities (Cash Flow Statement) of a company.

What is financial statement analysis? How is it used?

Financial statement analysis examines the records of a business from a variety of perspectives to create a clearer understanding of the overall financial health of an organization. It is used to determine the best way to strengthen a business.

There are typically four elements utilized in a financial statement analysis: profitability, solvency, liquidity, and stability. Profitability looks at current and past performance to evaluate the best course of action to increase profitability in the future. Solvency evaluates the debt of the organization to ensure that the business will not close due to unsurmountable debt obligations and determine an action plan to pay it off. A business must have a clear understanding of their liquidity (or cash position) to ensure they have a positive cash flow to meet debt obligations and immediate cash needs. Lastly, financial statement analysis looks at the financial stability of the business and evaluate for problems or situations which could cause it to fold. This is the long-term health of the organization and monitors for financial pitfalls that need to be avoided or corrected quickly.

In short, financial statement analysis evaluates any financial-related entity to determine its performance and viability. This is accomplished through the application of a variety of ratios derived from the calculations provided in the financial statements which are compared with industry standards.

Investors, financial institutions, and vendors utilize these reports to determine if they are willing to risk their money in your organization.

Company Financial Statements

The Balance Sheet displays a snapshot of assets, liabilities, and net worth (book value) of a company at a specific point in time (i.e. Dec. 31, 2017). It is the best accounting statement for analyzing the financial position of an individual or company.

The Income Statement provides the revenues, expenses, and profits (or losses) of an entity over a specific period of time (usually quarterly or annually).

The Cash Flow Statement shows where an entity’s cash is coming from and where it is going to. This statement separates the cash flow from operations, investing, and financing activities in a consolidated statement. Financial statements are the best means to determine what has happened in the past and gauge current trends.

Company Financial Analysis

No one statement provides sufficient information for company financial analysis. But by putting together the three financial statements, the analyst has the information needed to understand the financial position, profitability, and operating, investing, and financing activities of a company.

All three company financial statements are connected. The profit or loss from the income statement will be reflected in the assets and liabilities of the balance sheet. Changes in cash flow will be displayed in both the balance sheet and income statement and vice versa.

Understanding the purpose of company financial statements, and how each of the three relates to one another, provides important information for company financial analysis.Financial statements are used by shareholders, executives, employees, investors, potential lenders such as banks or vendors, and any other person or institution that needs to analyze a company.