Why Do You Need Updated Financial Statements For Ratio Analysis?

Financial ratio analysis is a standard tool used to measure the company's financial performance using ratio metrics. Every business maintains a record of its financial transactions to  

1. Calculate tax liability, 

2. Prepare financial statements 

A company prepares its financial statements to present to its internal and external stakeholders and impact their decision-making. The external stakeholders assess the company's financial position to know its financial standing, debt-paying capacity, return on investment, and such indicators. Internal stakeholders like management and employees use this information to predict and set standards for future performance to improve the company's economic position. Financial ratio analysis is one way to study the elements of financial statements and indicate their meaning. It interprets the balance sheet and income statement components and reflects financial condition through various metrics like current ratio, debt-equity ratio, inventory turnover, etc.  

 

Ratio analysis involves the computation of different components with each other. It makes the statements comparable across industries, companies, and business sectors. However, businesses need to have up-to-date data to make an informed decision. Since components of ratio analysis come from financial statements like: 

• Profit and loss statement/ Income statement 

• Balance Sheet/ Position statement 

• Cash flow statement 

These statements must contain the latest and up-to-date information to facilitate decision-making by investors and managers. If the data available is even a year old, it will not serve the purpose of financial ratio analysis. Companies undertake this analysis periodically to assess their financial health. If they rely on past data for the current study, it will not be a reliable measure. You can compare your performance across different years or decades through ratio analysis, but else, previous data won't be helpful at all. It indicates the company's profitability, liquidity, and solvency.  

 

Financial ratio analysis offers the following benefits:  

 

• Set goals for higher performance:  

With the help of ratio computation, businesses can set goals for future performance. You can compare your performance across years and different industries and set benchmarks to achieve them. Setting realistic standards can help them improve their growth potential.  

 

• Analyze performance across years and competitors: 

 

Businesses can use  project accounting software to measure the execution of financial plans and policies in the current year and compare it with different periods and industries. Cross-section comparisons facilitate competitive decision-making, whereas time series analysis indicates trends in a company's growth and performance.  

 

There are many ratios available for firms to use per their need. These include:  

1. Liquidity ratios= Current ratio, quick rato, etc 

2. Solvency ratios= Debt to equity ratio, total debt ratio, etc 

3. Efficiency ratios= Stock turnover, receivables turnover, payables turnover, etc 

4. Coverage ratio= Debt interest coverage ratio, time interest earned ratio 

5. Profitability ratios= Net profit, gross profit, return on total assets, return on equity, etc 

6. Market value ratios= Price-earning, price-cash flow, market-book value ratio, etc 

Dealing With Own or Associated Parties' Business Bankruptcy

 Every business establishes itself to earn profits and achieve its vision and mission. However, there are many hurdles in the way acting as roadblocks and, if not treated properly, can lead to the end of the business. Every year several firms declare insolvency and bankruptcy due to poor business bookkeeping or other reasons. Bankruptcy affects not just one company but every associated party. Let us first know what bankruptcy means.  

 

Bankruptcy refers to a company's inability to continue and pay off its debts. In such cases, they have to file a petition with the court to stop its creditors from pursuing them for their debts. There is administration bankruptcy which involves appointing a new administrator who can get the company out of deep waters to stay afloat. In such cases, businesses do not close, but the accounts receivable management changes. Bankruptcy affects the business and its owners as their credibility and reputation reduce in the market. For associated parties like creditors, they have to forget the amount they were to receive and put it into bad debts. Customers and the general public are also affected by the bankruptcy of a particular organization.  

 

If you are a creditor of a company that declared bankruptcy, you can do the following:  

 

• Determine the type of creditor: 

 

First of all, you must know which type of creditor you are to the company. The different types of creditors include:  

• Preferential creditors: They get priority and may consist of taxation authorities and wages for employees.  

• Secured creditors: These creditors have some assets as collateral for the debt to the company. They may be financial institutes that lend loans to the company and take assets like cars, buildings, machines, etc.  

• Unsecured creditors: These creditors do not have any assets to back their debts like suppliers and contractors. They come at the last of its priority list to return its debts.  

 

• Filing claim: 

 

Once a company files bankruptcy, all the creditors get a notice to prove in writing why the company declaring bankruptcy owes you money. You have to file these claims with proper documentation within the given timeline to ensure you get the payment. In such cases, your business bookkeeping must give adequate attention to claim to file and stop any collection efforts towards the bankrupt firm. To receive such claims from the court, you must be on the creditors' list of the company. However, these claims do not assure that you will receive your dues fully or partially.