There are various numbers of methods used by accountants and financial analysts to analyze financial state of a company. The purpose of the financial statement analysis is to provide information to financial managers and analysts to make thorough decisions about their business. Assessing financial position and performance of an enterprise is a skill that every manager needs to have to make the best and right decisions for the company. The analysis of the financial statements is a method of comparing, judging or valuate situation of particular parts of balance sheet, on the basis of which important decisions are made. So, financial statement analysis is an analysis of balance sheets for the past, present and future of the enterprise. Balance sheet position values separately do not have high analytical significance, but if we compare them to the values of other balance sheet positions then their comparative value increases. Financial statement analysis is a study of the company's financial statements by analyzing the reports. Report analysis is a tool that easily calculates and interprets reports that are used by investors, creditors, enterprise executives and others. Financial Analysis is the process of assessing the financial position of a company by analyzing its stability, viability and profitability. One of the primary objectives of financial analysis is to recognize changes in financial trends, to help measure the progress made by an enterprise and identify a relationship to draw a logical conclusion on the performance of the company. Another major aspect of a financial analysis is comparing the performance of the company with its competitors.
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The essence of financial statements' analysis from the position of a user is to review and evaluate the information in the reporting to obtain reliable conclusions about the past state of an organization aiming at foreseeing its functioning in the future. Evaluation of financial statements is a process by which the past and current financial position and performance of the company are assessed. Because of financial statements' analysis, the company's most important characteristics are also determined, which testify, in particular, about its success or the risk of bankruptcy. For different users, in terms of the scale of its implementation, the analysis of financial statements depends on a specific goal. At the same time, the analysis and direction of work while analyzing financial statements can be different. Therefore, company's financial statements can be useful for different interested parties.
Preparation of financial statements is important for the successful conduct of the activities of any enterprise. It is connected not only with summarizing the results of its financial and economic activities for a certain period, but also with determining the quality of company's relations with public authorities that control the conduct of any economic activity in the state, including the activities connected with the receipt of profit. Thus, depending on how timely the financial statements are presented by the company, there are penalties imposed on it, the frequency and severity of conducted tax audits. It is also an important fact that timely and high-quality financial statements are required to obtain a general picture of a legal entity's performance, its effectiveness, financial stability and other indicators. That is why the company's financial statements are important for its management and for external bodies
The efficient use and effective interpretation of financial statements is necessary as leading cause of failure and financial distress is only the poor financial management of business.
Owing to dire consequence that improper accounting practices can have on enterprises producing incomplete financial statements, it is imperative that the accounting practices of enterprises supply holistic and pertinent financial information needed to improve economic decisions made by entrepreneurs. Information gathered revealed that majority of enterprises prepare financial statements annually yet most of them have difficulty in accessing finance from financial institutions and also difficulty measuring their financial performance based of the accounting records kept due to inadequacy of the accounting records to help prepare sound financial statements representing the true state of financial standing of the enterprises.
Managerial decision is one of the keys to success in an organisation. And as such, management of a given organisation makes decision based on financial performances prevailing in such establishment.
Half of all start-up businesses fail during the first 5 years of their life cycle (Small Business Administration, 2014). The lack of financial analytical strategies on the part of business owners is a factor that affects business success . These failures not only have negative impacts for the entrepreneur but also have adverse consequences for a country’s economy as the increase in economic activities supports and strengthens a country’s ability to generate more tax revenues. As governments are finding ways to boost economic activities, they have recognized the contributions of businesses to growth and economic development for their countries. Given the critical role that start-up companies have within a country’s economy, when a business fails the affect extends beyond the local community.
Entrepreneurs face many uncertainties that affect business success. Depending on the strategies that a company uses, a firm can realize successes or failures. If business owners were to understand and implement clear strategies and processes, their operations would become more effective and efficient, determining their levels of success. To do otherwise would place the firm in a compromising position that disrupts its ability to become successful and sustainable, resulting in business failure (Fraser et al., 2015). Notwithstanding the context of potential causes of business failure within the first 5 years of operation, it is important that business owners clearly understand the business problem within their organization. In doing so, they become more aware of potential issues, and acquire the strategies and knowledge to adequately deal with and find ways to mitigate the impacts of earlier failure.
The lack of knowledge and strategies for implementing key financial business processes negatively affects business operations. An estimated 30% of businesses fail within their first 2 years of operation, and more than 50% of businesses fail within their first 5 years.