Since Balance Sheets present the health of a company as of a snapshot in time, v
ID: 2759330 • Letter: S
Question
Since Balance Sheets present the health of a company as of a snapshot in time, valuable information will be lost if managers do not take the opportunity to compare the progress and trend of a business by regularly evaluating and comparing balance sheets of past time periods, or versus its competition. Information is power. Obtaining information from the preparation and analysis of a Balance Sheet is one financial management tool that may mean the difference between a company's success and failure. Describe one or two ways in which you would utilize your balance sheet (using historical data) to make operational and/or strategic decisions moving forward.Explanation / Answer
The major ways in which information from a Balance Sheet can be utilised for decision making are : (i) Understanding the financial stability of the organisation Based on the trends (current year v/s previous year) and ratio analysis for various factors, it is now simpler to make an assessment regarding the financial viability and stability of the organisation which is being scrutinised. The prime ratios from the Balance Sheet like current ratio, quick or liquid ratio, debt to equity, return on net assets and return on equity provide an insight into the solvency and profitability of the Company's operations. (ii) Understanding a Comparison with Budgeted Data Normally, Balance Sheets also have budgets prepared, akin to Income Statements, which show the projection for a particular financial year, and actuals thereagainst. A clear comparison itemwise, can help understand where the Company has gained funds and utilised them. An assessment of the decisions to be made regarding capital expansion or long term spending are dependent on the fact of whether the Company has fared better than its expectations, or falls short of its targets.