Impact of Finances on Financial Statements - Essay Example

When there is a lot of cash in the business, the income will increase which will also lead to an increase in expenses. However, the increase in revenue may not necessarily lead to a proportionate increase in profits when the cash is in excess to the point of exceeding the optimal capital mix.

The influx of funds also affects the shape of the balance sheet more as the balance sheet is responsible for recording the assets and liabilities of the business as well as the capital and debt. As such, it is largely affected by the changes in equity from the upsurge of capital. When there is an increase in funds in the business, the total assets increase, but also the liabilities since both sides of the balance sheet have to balance. There will be more current assets than current liabilities which means that the business will have a lot of cash at hand in the short run. However, mismanagement of such funds and the cost of the long-term loan will have a long-term impact on the company’s balance sheet. This is because an influx of funds - loans, grants, share issue income, retained profits indicates the ease with which money enters the business which means that it is very easy also for the money to move out of the business in the same way. While there are huge benefits to a company when it is sufficiently liquid, the volatility the influx of finances will bring forth to the company can be challenging as it requires improvement in management practices (Brealy, Richard, & Stewart, 2003).

The influx of funds confronts the management of companies with the need to limit the excessive liquidity in the company as this can lead to financial imbalances such as the prices of long-term assets. Moreover, if the funds are not properly managed, they can increase the current and long-term liabilities of the company. As such, organizations must be transparent about this by providing more information regarding the performance of the business to expose the type and extent of risks the company is facing concerning the influx of cash. More information about cash dealings increases transparency as well as a certainty to the investors. When financial statements are prepared from fully updated reports, the company minimizes the risks that are unforeseen since the interpretation of the data is made easier. It is prudent to note that companies that are always transparent are very eager to publicize their capital and earnings as it is a reflection of their performance. This enhances good financial conduct which prevents mismanagement of funds or unforeseen volatility (Brigham, & Ehrhardt, 2005).