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Importance of Financial Statements Analysis

Home Assignment Answers Importance of Financial Statements Analysis

The financial statement analysis is important as it has the utility to satisfy the different interest lines of the various sections of the parties like the management, creditors, public etc. are laid down.

  • Importance to Management

There is a need for the scientific and analytical strategy in the management of today’s enterprises. This is because of the growth in the size and complexities of the factors that are affecting the business operations. For such purposes, the administration of the company needs updates, accurate and systematic financial records. This will help the management to comprehend the position, progress and the prospects of the business organization.

The management of the organization can be used to make suitable approaches and actions for the future. The financial statement is the main tool by which the management communicates to know about the performances of the working of the other departments and their activities are then justified.

A comparative analysis of the financial record discloses the inclination in the growth and position of the business organization. this also helps the management to make certain changes and alterations in the strategies to deter the undesired circumstances.

  • Importance to shareholders

The management is different from the organizations in case of the businesses. The shareholders cannot directly partake in the routine tasks and activities of the businesses. However, the outcomes and the conclusions of all such activities should be clubbed and informed to the shareholders at the annual general body meeting in the form of financial statements. With the help of these statements, the shareholders are able to get aware of the efficiency and the effectiveness of the management. The capacity of earning and financial state of the company is judged. By such analyzation, the stakeholders come to know about the capability of the organization to earn revenues and further, decide about the investments that need to be made.

  • Importance to lenders/creditors

The financial statements act like a guide for the current and the upcoming suppliers and the lenders of the company. By going through certain crucial tests related to the financial reports, the liquidity, profitability and long-term solvency of the company can be known. This will help in taking correct decision for the future.

  • Importance to labour

Certain bonus and incentives are allowed to the workers, that too depending upon the size of the profit as disclosed by the audited profit and loss account. The P&L account is of great importance to the workers and labourers.

  • Importance to the public

Business, being a social body, has no direct contact with the various groups of society. These groups of people are keen to know about the progress, position, and prospects of the business enterprise. Such people are financial analysts, lawyers, trade associations, trade unions, the financial press, research scholars and teachers etc. Only, with the help of the published reports, the people are able to determine, judge and comment upon the enterprise.

Must read: Objectives of Financial Analysis

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