Page 422 - Business Principles and Management

Chapter 15 • Business Financial Records

15.4 Analyzing Financial Data

Goals Terms
• Describe several types of financial • cash flow • certified public
analysis that help in the under- • working capital accountant (CPA)
standing of a business’s financial • consultant
condition.
• Identify where business owners
and managers can turn to get
help with understanding and
using financial information.

Using Financial Information

Managers use financial statements as well as other financial information to under-
stand the financial health of a business. Others are also concerned about the
business’s financial health. That includes current and prospective investors; credi-
tors, including banks and suppliers who may make loans and offer credit to the
business; government officials involved in taxation and oversight of business prac-
tices; and customers. They want to know such things as whether the cash flow
and working capital are sufficient to pay the company’s bills. They also analyze
ratios calculated from financial statements to identify where any financial prob-
lems lie.
Financial statements must be prepared in a way that provides a clear and
understandable picture of the financial health of an organization. The people
who are affected by the financial condition of the business need to have access
to the financial information and be able to analyze the information to draw
conclusions about its financial health.

CASH FLOW

Cash flow is the movement of cash into and out of a business. Money comes in
immediately as a result of the sale of goods and services for cash and later from
customers who buy on credit. Money goes out to pay for various costs and
operating expenses. Because money does not always flow in at the same rate
that it flows out, managers need to carefully plan for the flow of cash.
Regardless of the size of a business, cash is both a short-term and a long-term
concern. Businesses must have cash on hand to pay bills when they are due and
to plan ahead for large cash payments, such as the purchase of equipment or the
launching of a new product.
Figure 15-9 (see p. 410) illustrates cash flowing in and out of a retail piano
store through the part of the year when cash shortages and overages are likely to
occur. The bulk of the company’s sales occur during the December holiday sea-
son. Although the company sells some pianos for cash, it sells most on credit.

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