Question

How would: "Financial forecasting", "reporting financial performance", and "analyzing past results/identify trends/make recommendations for improvements" each impact an income statement and balance sheet of a company? Illustrate your claims using specific examples.

Answer 1

Financial Forecasting
A financial forecast is simply a plan which shows the direction your business is heading by predicting your revenues and expenses.Financial forecasting is very important for survival in competitive market by creating a sound strategy. It also helps in maintaining necessary control whenever the actual results deviate from the Forecasting. It keeps business afloat and successful by maintaining a steady flow of profit and growth by making sure that unnecessary risks are avoided which can put business into financial trouble. Financial forecasting helps in maintaining a steady income statement by projecting future revenues and expenses of business. Forecasting also helps in showing a favorable balance sheet by preventing situations of cash shortages, assessing the assets that might be needed for future business purpose and maintaining a favorable capital structure so that company don't face the risks of going into insolvency. Example :-
--Creditors feel secure to extend credit to business when they maintain a favorable Current assets to current liabilities ratio, ---Banks and other investors feel confident to invest in the company when they see that it's has a favorable debt to equity ratio. It is Financial Forecasting which helps in structuring and maintaining a favorable financial statements

Reporting Financial Performance
Reporting financial performance helps to analyse and report the performance of business such as income earned by it and financial position of the enterprise.Financial statement reports help the investors in knowing how business is utilizing their investments as well as whether they are meeting their targets without delay. Income statement reports helps in knowing the various expenses and purchases made by business as well as income generated from such expenditures. Balance sheet gives important information such as Liquidity position, Level of assets over liabilities , level of debt over capital , cash position etc which helps the interested parties by providing them information needed to compare current business performance with competitors, past performance and it's own forecasting. It helps them in making important decisions , for example:-
--Creditors depending on financial reports decide whether it is safe to extend further credit or they should rescind it
--Investors depending on it's income trend can decide whether they should invest in shares and debentures of company or not,
--Government get the information related to income earned by business as well as their sources for taxation purpose etc.

Past performance /Trends /Recommendations for improvements
By analyzing past performance, a company can depict whether it was able to meet it's expectations or not and if there were any deviations then to what extent ? No business can survive in the long run unless it overcomes it's shortcoming and make improvements necessary for it's survival and growth in a cutthroat competitive market .By studying past performance, a company can create trend analysis to see the direction at which the business is heading by comparing past performance with current financial conditions.It can study it's previous financial statements to know and take corrective actions for improvement in it's current Income statement and Balance sheet. By comparing business data over time and making trend analysis, business can develop strategies needed to respond to such trends in line with it's business goals. Such strategic development helps business in achieving it's goals effectively and maintaining favorable income statement and balance sheet by making improvements in it's products, services and processes and it should not be a one time thing but a continuous process so that it can overpower it's competition and achieve it's objectives.Recommendations for improvements helps in Increasing productivity of business, improving quality of it's products and services, lowering it's costs, increasing employee satisfaction, increasing goodwill etc. This all helps business in improving it's financial performance and position by taking corrective actions to improve it's income statement and Balance sheet. For Example:-
--If a Company follows a certain production process and fails to implement an advanced and economical process as used by it's competitors than it runs the risk of incurring unnecessary expenditures and decreasing it's profits
--If a Company don't make changes in it's products which meet the taste and preference of consumers than they will shift to it's substitutes as a result of which it will lose share in market and ultimately hamper it's growth and profits