The Importance of having a Strong Financial Position at the End of the Year for Companies
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As FY 2020-2021 draws to a close, companies are busy assessing their financial standing. Some of the reasons why companies need to have a strong financial position are explored below.
Companies that have a strong financial position attract investors and creditors. Investors look for companies that are stable, reputable, and profitable. Similarly, creditors would only provide loans to companies that can repay them with interest. They also want to understand where their money will be utilized.
Financial statements are used to convey the past successes and future expectations of the company thereby explaining its financial standing. Gaining the trust and goodwill of its investors, creditors and even industry analysts is crucial for the company to ensure a steady supply of capital to fund its operations and projects.
The balance sheet of the company addresses the above-mentioned concerns by providing detailed information about the company’s asset investments. They also mention the company's outstanding debt and equity components so that debt and equity investors can gauge their relative positions in the capital mix of the company.
Other important financial statements that companies use are the income statement, cash flow statement, and statement of shareholders equity. The income statement reports the sales, expenses, profits/losses of the company.
The cash flow statement helps investors understand if the company has enough cash to pay off asset purchases and other expenses while the statement of shareholders equity helps investors assess the net worth of the company which is the company's total assets minus its total liabilities.
Soon the wait will be over, and financial statements of companies will soon be released helping us to judge how each company has fared in the past financial year and as current or future investors we can make informed decisions.
References:
https://smallbusiness.chron.com/importance-companys-financial-statements-21332.html