To achieve effective financial management, all company areas should use and provide data to obtain thorough knowledge of business operations. One of the main roles of the financial manager is to analyze the data and transform it into useful information so that the different corporate areas can evaluate performance against projections, and on this basis make decisions to correct or improve corporate strategy objectives.
The Inter-American Investment Corporation (IIC) recommends that companies maintain detailed information on several key aspects for successful financial management. For example, business should keep at least the following financial statements such as cash flow statements, inventories, and accounts payable and receivable to have control of the financial management.
Financial statements and ratios illustrate key aspects of the performance of any company. This information is not only relevant to creditors and prospective investors but also to the company’s management.
Comparing these figures and trends with that of competing companies can be a key aspect for defining general corporate strategy. In many cases, a careful analysis of financial indicators can determine the risks or viability of the enterprise over the long term.
Financial Statements: these reports provide greater insight into the company’s financial position. The balance sheet and the income statement are the basic accounting reports for any business from small and medium enterprises (SMEs) to the large multinationals worldwide. These reports give us a glimpse of the company’s financial position at a specific period.
The income statement compares income generated throughout a period of time against cost incurred during the same period. It is important to distinguish between gross income (sales income minus the cost of goods sold) and net income (gross income minus expenses for sales, distribution, management, etc.) If costs exceed income, the company incurred loss during that period.
Indicators and financial ratios: the balance sheet and income statement contain several indicators and ratios that serve as tools to aid the financial manager throughout the decision-making process. They are also used by creditors and investors to detect the feasibility and risks of investing in or granting credit to a company. Below follow the main indicators that enhance financial management and knowledge of any company.
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