How Do I Better Understand The Financial Position Of My Company?

The financial position of your company is the primary concern of every investor. Your financial strength is a clear indicator of your overall progress. Understanding where you stand financially can be simplified by looking into your company’s financial statements. This is also one of the key indicators for any PERT analysis.

When you take a loan from the bank, you have to list all of your assets and liabilities. This information is used by the bank to establish the strength of your financial position. Your overall financial position is determined by the quality of your current assets and by placing a conservative valuation upon them. Liabilities, such as mortgage and credit card debt, are also taken into consideration. By subtracting the total liability value from your total asset value, the bank determines your net worth or equity.

This exact process is also used by investors when determining the financial position of a listed company. The only difference would be one extra step when considering that financial position in relation to market value.

Use Balance Sheets as Your Starting Point

Your company’s assets and liabilities ultimately define your financial health and performance. Shareholder equity is also included in your financial position, and all of the information is presented to shareholders in the balance sheet. When an investor wants to determine your financial strength, they will almost always start with your company’s annual report. The main concerns here are assets, liabilities, and shareholder equity. These indicators provide clear insight into the financial management capabilities within the company.

Understanding Current Assets and Liabilities

The cash flow from operating an inventory-based system is significant for investors and their financial analysis. Assets and liabilities can be broken into current and non-current items. The current items group includes all those that have an expected life of fewer than 12 months. You can use any business model that depends on selling items from their storage as an example.

For example, if an outlet expects their reported capacities to be sold next year, the level of inventory will fall while the amounts of cash will rise. If the inventory value of an outlet goes down by 10%, but sales saw an increase of 15%, this is a sign that they are managing their inventory relatively well.

Any obligation the company has to pay within the coming year falls under current liabilities. They include existing commitments to suppliers, employees, the tax office, and providers of short-term finance. The ability to manage and ensure enough funds for these obligations provides a clear insight into the company’s financial health.

The Current Ratio

 Responsible financial management and regular debt payments can influence a positive ratio. It is calculated by dividing total current assets by total current liabilities. Desired financial ratios vary across industries, but a low point would include an indication of insolvency.

In contrast, a high ratio would indicate an unnecessary build-up in cash, receivables, or inventory. The company’s performance for this analysis is measured according to historical data.

Non-Current Assets and Liabilities

 Any assets or liabilities that are expected to extend beyond the next year fall into this category. For many companies, these would include plant equipment, property, total operating expense, and general needs for running the business. Borrowings and leasing contracts for plant and equipment can also be considered as long-term liabilities.

Book Value

By subtracting total liabilities from assets, you get shareholders’ equity. If you want to know the accounting value of the shareholders’ stake in the company, this is the way to do it. Book value is made up out of contributed capital by shareholders over time and total gross profit made by the company.

Market-to-Book Multiple

When investors determine if a stock price is undervalued or overpriced, they compare a company’s market value to their book value. It is expected that companies with low market-to-book stocks perform much better than those with high multiples. To get a sense of how competitive your company is when it comes to market-to-book multiple, you would need to compare it to other publicly listed companies in your industry and niche.

Outsourcing as a Permanent Solution

 Knowing your company’s financial position and health is crucial for decision making and management in general. Understanding profitability ratios and putting them together can be exhausting and very complicated at times. Constant regulatory changes and increased transparency demands from investors continuously slows down operations of in-house financial administrations. Without proper investment in staffing, equipment, office space, and training, you can’t expect timely and accurate reports from your financial department.

Outsourcing has shown that it can become a permanent solution to consistent problems companies face when it comes to financing. WIth finance-as-a-service, executives have more time to focus on decision making, while the outsourcing service provider handles all of your financing activities.

Thanks to their access to top-notch talent, companies like Consero can provide high-quality service with no impact on the operating expenses of the company. Since these service providers are always up to date with the accepted accounting principles, you don’t have to worry about spending additional resources on staff training and education. Finance-as-a-service also guarantees an accurate statement of cash flow and a clear overview of the financial health of your company. With outsourced accounting, you can boost your company’s performance while at the same time spending less on operational costs and in-house staffing.

Conclusion

Understanding your profitability ratio and knowing all of the key indicators that influence your company’s financial position isn’t as complicated as it sounds. Still, it does require quick access to accurate financial information. By constantly paying attention to your assets and liabilities, you can have more control over the company’s finances but also send a strong message to investors.

By outsourcing accounting to the right partner, your company has constant access to the valuable financial information that is of high interest to your potential investors. After all, it is your job to convince them that your company is a good investment opportunity. Your financial position plays a significant role in that decision-making process.


Deliverables include:

  • Overall health assessment of your accounting and finance department
  • Unbiased suggestions on improvements
  • System optimization
  • Consero proposal

Ready to simplify finance? Request a 30-minute consultation.