Decision-making is crucial when it comes to getting a company on the right track and producing the expected benefits. The problem is that sometimes, getting decisions right is not exactly a simple task, especially when you do not know the financial state of a company.
Aware of this, from AYCE Laborytax we are going to give you the keys to evaluate the financial state of your company,with the aim of facilitating decision-making and helping you to always make the right decision.
What is the financial statement of a company?
When we talk about the financial state of a company, also known as the ‘accounting statement’, we are referring to the financial situation in which a company finds itself at a given time. It also refers to documents that display accounting information for the company in a grouped and aggregated manner over a certain period of time.
That said, knowing the financial statement will allow us to know if the company is going through a good or bad time, and therefore, it will facilitate our decision-making. Here the General Accounting Plan also plays a very important role.
Some examples of the financial documents mentioned above are the liquidity ratio, cash flow, availability, etc. These documents should show a ‘photograph’ with both the most important economic and patrimonial information.
“The financial statement groups together all the operations carried out in a given period of time offering a summary of all of them.”
Apart from facilitating the management of the enterprise, it is necessary to keep the financial statements of the enterprisecorrectly kept; since it is mandatory to present the financial statements once a year in the Mercantile Registry.
How to evaluate the financial status of the company?
Once we know what the financial status of a company is, let’s see how it should be evaluated.
The first thing to say is that when preparing the document in which the financial statements of a company will appear, you must follow the structure marked by the general accounting plan,as well as apply the accounting principles accepted by the company.
“You have to decide which are the most important financial ratios to measure the management and planning of the company.”
There are different types of financial ratios that will allow us to evaluate the financial status of a company.
Ratios to financial statements
- Liquidity ratio
The liquidity ratio measures the degree of solvency of a company,which serves to know the capacity it has to face the payment of debts, as well as to anticipate economic problems in the future.
- Cash ratio
The cash ratio indicates the ability of a company to deal with short-term debts. To do this, compare the liquid resources of the company, as well as those that could be a short period of time. It is responsible for measuring the most immediate solvency.
- Availability ratio
Finally, there is the availability ratio, which is responsible for measuring a company’s ability to meet the short-term demand. The higher the availability ratio, the greater the financial stability of the company.
Economic and financial profitability ratios
- Economic profitability ratio
The economic profitability ratio, as its name suggests, measures the profitability that a company has obtained through the investments made during the development of its activity.
- Financial profitability ratio
On the other hand there is the financial profitability ratio, which calculates the profitability obtained by the owners of a company during each year. The higher this ratio, the better it will be for the owners.
Ratios of average collection and payment periods
And thirdly there are the ratios of average periods of collections and payments, through which you will be able to know if the policy of collections and payments of your company is sustainable,or if on the contrary it is not profitable at all.
They have a fundamental importance, since when buying and selling on credit, it is key to know the time it takes both to pay, as well as to collect,or what is the same, the average period of collection and payment.
They will help you manage the treasury of the company in a much more effective way,allowing you to make the changes that are necessary at all times.
Once calculated, the average collection period will be indicating the number of days on average,that your customers take to pay, while the average payment period, will show you how long it takes your company to pay the different suppliers.
The financial statement will offer you useful and important information about the activities carried out,the net worth and the viability of your company. In some way it will indicate the state of health in which your company is, which will help you when making decisions that allow you to take your business on the right track.
In case you have any doubts about how to evaluate the financial state of your company, our tax advisors from AYCE Laborytax are at your disposal to advise you on everything you need.