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Financial statements used by managers

There are three key financial statements managers should know how to read and analyze: the
balance sheet, income statement, and cash flow statement.

The balance sheet provides a snapshot of a company’s financial health for a given period. It
lists the assets, liabilities, and equity line by line for the period so that stakeholders can
understand the breakdown.

The income statement, also known as the profit and loss statement, or P&L, gives an
overview of the income and expenses during a set period. Typically presented annually or
quarterly, the income statement allows businesses to compare trends in income and expenses
over time.

Finally, the cash flow statement details the inflows and outflows of cash for a specific period.
Broken into operating activities, investing activities, and financing activities, the cash flow
statement demonstrates the business’s ability to operate in both the short and long term.

When analyzed together, these statements provide a holistic view of the financial health of
your organization. They can be used to learn from previous pitfalls and successes as you
strategize for the future. Here are six ways you can leverage your company’s financial
statements to excel as a manager.

Related: How to Prepare a Balance Sheet: 5 Steps for Beginners

6 WAYS MANAGERS CAN USE FINANCIAL STATEMENTS

1. Measure Impact

As a manager, it’s important to have a method for tracking the impact your efforts have on
your company’s bottom line. Take a look at your company’s income statement, and note the
direct expenses related to the revenue for that period.

Perhaps you purchased a piece of software, requested more ad spend, or hired a specialist for
a big project. Did those expenses result in the net income you were targeting? Moving
forward, you can learn from your mistakes and double down on investments that paid off.

2. Determine Budgets
Financial statements are also useful when managing and planning budgets. Because the
financial landscape is ever-changing, John Wong, HBS Online’s Senior Associate Director of
Financial Planning and Analysis, cautions against using previous financial statements as a
starting place for future budgets.

“Historical data is essential to building a budget, but should be used as a reference point and
not necessarily a starting point,” he writes in a previous blog post.

An understanding of your company’s financial health and history is necessary when

budgeting, and should be paired with a forward-thinking mindset.

3. Cut Unnecessary Costs

Being able to see your company’s expenses line by line on both the income and cash flow
statements can highlight areas where it’s possible to cut costs. Maybe you’ve been paying a
monthly subscription for a service you no longer need, or your team outings could be scaled
back in favor of more inexpensive activities. Seeing a list of every expense and how it
impacts your company’s net income can be an eye-opening chance to save money and
reallocate spend where it’s needed most.

4. Think Big-Picture

Keeping the broader health of your organization in mind is vital when managing your team.
Analyzing the balance sheet, income statement, and cash flow statement can allow you to
understand the ins and outs of your company’s finances and give you bigger-picture clarity to
guide your goal-setting and decision-making processes.

Related: 5 Ways Managers Can Use Finance to Make Better Decisions

5. Align Across Departments

Your company’s financial statements can be used to ensure multiple departments are on the
same page. When managers from each department have analyzed the statements, discussions
about goals and budgeting can center on a shared understanding of the organization’s current
financial health, and offer perspective into other managers’ goals and motivations.

6. Drive Team Motivation

Consider using your company’s financial statements as tools to motivate and engage your
team. The income statement can show how your employees’ projects positively impacted the
company’s revenue, which could boost their performance and drive.

When setting team goals, leverage financial statements to provide context for why specific
benchmarks were targeted and the thought process behind your plans for reaching them.
Instill in employees your same big-picture mindset and the knowledge that their efforts make
a tangible difference to the company.

2.. Financial Statements and decision making

How do financial statements help in decision making?

there are three main areas where financial accounting helps with decision-making:

1. It provides investors with a baseline of analysis for—and comparison between—the

financial health of securities-issuing corporations.
2. It helps creditors assess the solvency, liquidity, and creditworthiness of businesses.

What is the importance of financial statements in the decision making process of finance
managers?

Not to be overlooked are the management tools you have at your immediate disposal: your
business’s financial statements. Financial statements can be used by managers to track
performance, budgets, and other metrics, and as tools to make decisions, motivate teams, and
maintain a big-picture mindset.

What are the importance of financial statements?

Financial statements provide a snapshot of a corporation’s financial health, giving insight into
its performance, operations, and cash flow. Financial statements are essential since they
provide information about a company’s revenue, expenses, profitability, and debt.

How important is the financial statement in making business decision?

Although often overlooked, the income statement is an important indicator as being able to
internally generate sufficient cash is key to maintaining a healthy business. By providing a
steady and up-to-date financial reporting, a business is able to make appropriate decisions to:
Reduce costs. Increase sales.

What are the four basic financial statements and what are they used for?

They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4)
statements of shareholders’ equity. Balance sheets show what a company owns and what it
owes at a fixed point in time. Income statements show how much money a company made
and spent over a period of time.