How Does Information From Financial Statements Influence Business Decisions?
Information from financial statements influences business decisions by providing data that enables you to shift your planning and anticipate upcoming cash flow crunches. To get the most from your financial statements, prepare them regularly and base them on thorough, current information. Honest accounting data enables you to make solid, informed decisions.
Your balance sheet provides an overall picture of the financial health of your business by comparing assets and liabilities, and calculating your net worth. Balance sheets influence business decisions by showing whether you can afford new investments, placing these decisions in the context of a bigger picture. If there is credit available to your business, it can be easy to lose sight of the fact that these capital infusions do not represent actual income. A balance sheet influences business decisions by reminding you of this reality.
Income statements influence business decisions by providing information about your company's profitability, pointing to areas where you could be earning more or spending less. An income statement lists all of your company's sources of income, as well as all of its categories of expenses. This format enables you to evaluate whether your company is disproportionately focused on a particular type of sales activity, such as wholesale or retail, and to decide whether you wish to create a more balanced revenue stream. In addition, the information on an income statement could help you decide to cut expenses in a particular area to improve your overall margins.
A cash flow projection influences business decisions by highlighting periods when you will be short of cash, enabling you to save during more bountiful times or think ahead to secure needed funding. By showing how much cash will be flowing into and out of your business over the coming year, your cash flow projection provides you with an essential planning tool, enabling you to make financial decisions to avert cash flow difficulties before they develop into full blown crises.
Your financial statement helps you make business decisions by enabling you to make an overall assessment of your business activities from a financial perspective. If your income statement shows that you are earning a profit but your balance sheet shows that you have no cash saved, then this information can steer you toward decisions that will improve your rate of savings. If your balance sheet shows that you have capital available, but your income statement shows that you are losing money, this information can help you decide to use available resources more frugally.