Question

How can the information from income statements and balance sheets encourage better management practices? After all we are not simply crunching numbers for the sake of crunching numbers. They typically can be applied to things. They can tell us stuff. Let's talk about it. Let's think about how this information can be applied to help run a business better, solve a problem, run a project better, etc.

Answer 1

The information from income statements and balance sheets can encourage better management practices in the following manner:

1. The amount of debt in the balance sheet is a critical factor in deterring the "going concern" of a business. If the long term debt is very high, then the overall cost of capital for the company as such and projects in general will increase which can be corrected by the management

2. The Current assets and the current liabilities give a clear picture of the working capital scenario and the liquidity situation of the business. This information will be captured in the balance sheet. Higher current assets are always preferred and management can take corrective steps if required to better manage the liquidity

3. The Shareholders equity when seen with the total number of shares outstanding of the business help the financial managers in calculating the book value of the business. From this, the investors can check whether the current share price is overvalued or undervalued.

4. The Net profit is the most important figure in the income statement which provides information about the profitability of the business and how the business is performing when compared to its peers in the industry.

5. The Revenues or the top line help analyse when the profits are generated due to the increase in revenue or better operational efficiencies.