Financial statements are crucial documents that help managers and business analysts to understand the organizations’ financial health. Namely, the three major reports – balance sheet, income statement, and cash flow statement – provide all critical information about the company’s assets, liabilities, and profitability (Ittelson, 2020). The data is particularly beneficial for management and investors since it highlights the strengths and weaknesses of the organization. In turn, managers can develop a new business plan to mitigate the existing problems and improve the organization’s profitability. For instance, the balance sheet might reveal insights into the company’s solvency or expose the disadvantageous assets which should be removed or modified (Ittelson, 2020). Ultimately, financial statements are essential to management since they directly affect the decision-making concerning the organization’s profitability.
Concerning assets, a CEO should focus on current assets (as opposed to noncurrent assets) since they can be easily converted into cash. This information is listed on the balance sheet and can help the CEO to understand the company’s solvency and opportunities for short-term development (Ittelson, 2020). Similarly, current liabilities are essential debts that should be paid within a year, making them a relevant metric for the CEO to consider (Ittelson, 2020). The balance sheet also reports the company’s equity, which reveals the amount of actual money held by the shareholders. It is a significant metric of the organization’s financial health that allows the CEO to understand the prospects of the business. The debt-to-equity ratio is another important factor that demonstrates the company’s resistance to economic deviations (Ittelson, 2020). Lastly, the CEO should seek the cash generation metric, which is generally represented as the “net increase in cash and cash equivalents” to understand the current situation of cash flow.
Reference
Ittelson, T. (2020). Financial statements: A step-by-step guide to understanding and creating financial reports. Career Press.