Predicting the Future of a Business - Essay Example

FINANCE AND ACCOUNTING By Finance and Accounting Introduction As a tool of communication for any operating entity that handles financial transactions, financial reports provide information that cares for the guidance of the management in decision making based on the historical aspect. A financial statement ranges from income statements, balance sheets, and cash flow statements. These documents provide users of financial information with the necessary data they need to satisfy their quest. These reports annual nature provide a continuous information need (Treasury, 2014). For any business entity that publishes their financial information, the regulatory framework needs to reflect closely in the statements. Most of these are publically traded companies that operate on a more public platform and have shares traded to the public hence the need to have the information availed in the public domain. Preparing the financials on this basis considers the need to have standard measures followed that each organization requires if it is to remain in check of their competition. The details of this paper reviews on the financial information availed in financial statements and the essence it provides in the prediction of the future or the development of future forecasts. Through the same statements, competition is easily managed. Users of Financial Information Various users of financial information require financial statements to develop a better understanding into the operations and the financial aspects of the company. Different users use these tools and the information there in for different reasons. They range from the management f the business, the directors, the shareholders, the general public, prospective investors, the government, legal institutions and even the current investors. The different uses that these people use the information for is as below: The management The management requires financial information in making decisions with regard to the company’s progress. Through these, they manage to control operations and run within the budgets. Successful management also develops their goals based on the financial goal set for the company and hence leading the company to better profitability and financial success. Vital decisions with regard to the employees, the purchases and the payment cycles easily made through consideration of the financials. The management makes decisions with more confidence based in the history of the financials that the company holds. They guide management in making decisions with regard to tough times. The directors The directors need the information to ensure that their company is performing well. They use this information to make the major decisions for the company and handle any results in a manner that protects the business from failure. Shareholders The shareholders of any company normally reflect on the financial information of the company to make decisions with regard to their shares. Shareholders may want to keep their shares held in a company or dispose them based on the financial performance of the company which is only determined through the consideration of the financial statements of the company. Many shareholders to use these tools to gauge the performance of the management of the company. Poor financial results indicate poor management that will help the shareholders in deciding with regard to the management. General public The public normally find it easy to determine the authenticity of the company through public display of their financials. Many companies have defrauded the public of their money and selling to them defect products. Many people make purchase decisions with regard to the availability of the company’s financials in the public domain since the information availed provide towards the future existence of the company and their products. Prospective investors: Prospective investors need this information to affect their future decisions on investment aspects in the company. The investors make their decisions based on the ability of the business to generate good returns in the future, which is based on the current financial statements. The government For purposes of taxation, the government needs the financial statements to make predictions on their revenue collection needs that come as taxation needs. The government also determines the authenticity of the operations of the company based on the ability it has to provide all disclosures in the public as per the standards of public companies. Other users of this information include legal institutions, that use them for bankruptcy claims and legal suits settlements. Predicting the Future of a Business Prediction of the future activities of the business and its progress becomes visible through the resulting tools that include budgets for operations, forecasted income statements, forecasted financial positions through forecasted balance sheets and the forecasts on the cash flows of the organization that manifest through cash flow statements. Through these predictions, the company is in position to predict their production levels and hence the future business and returns. Investors also easily understand the need to buy more shares or sale more to avoid losses and generate more profits for them. These items are discussed in details below: Operational budgets Operational budgets contain forecasts on the future movement of the finances of the company. The company uses this tool to ensure that the consumption of financial resources is well planned for. Through forecasted budgets, forecasted revenues become known and they are normally based on the financial statements from previous years. Forecasted budgets also help determine the expenditure that the company will incur in that particular financial year (Sun, & Lynch, 2008, p.394). These are developed with regard to the previous years considered to draw averages used for estimations. Forecasted income statements A forecasted income statement is a vital element in determining the forecasts in the possible profit that the business is in position to generate (Besley & Brigham, 2007, p.674). These also help in determining the production aspects of the company and the cost of production aspects or cost of sales that will go into the sales to produce an ultimate result for the company. Through these, it is possible for the business to determine their incomes and know the level of financing they require incase of borrowing needs. Their ability to sustain the interests of the borrowing is reflected through the financial statement. Majorly, this document helps in the prediction of future sales of the business. Forecasted balance sheets For one to understand the financial position of the company, they need to look at the balance sheets of the company and draw a conclusion based on the information presented within (Financial Statement Preparation Guidelines, 2003, p.3). The information on the capital levels, the aspects of working capital, equity and debt levels, assets and liabilities that the company has all feature. These provide the public and the different users of the information necessary to perform an analysis on the business for determination of the future of the business. A forecasted balance sheet provides the users with an understanding of a possible financial position that the company stands to fit in based on the decisions to carryon within the financial year. These all provide a simple approach to understanding a company and its future. Cash flow forecasts Cash flow forecasts provide the company with the ability to determine the future cash needs that the company may have (Fight, 2005, p.1). The need to determine if the current cash available is in position to run, the company through the next financial year is easily predicated based on these aspects. Through this document, it is easy to determine the level of external financing needed in the business and the sources to consider. Predicting production levels and level of sales Through these forecasts, the levels of production and stock purchases for the next financial period prove easy to determine. Undervaluation and overvaluation of shares The decision to buy, sell or hold shares of a company rest more on the level of valuation of the shares that relies heavily on the prevailing market conditions and their effects on the business. The undervaluation of a stock indicates the need for the shareholders to retain it or buy more especially if the stock is paying dividends also predictable through the cash flow statements. The overvaluation of a company requires that the shareholders sell their shares to obtain a profit especially for companies that do not pay dividends. Effectiveness of the Information For the effectiveness of the information in consumption by the different users discussed above, the reports that the company provides to the public must follow the accounting guidelines in their development. These include following the basic most of the principles governing financial aspects. These range from the historical concept, following the reporting standards, the going concern principle for businesses, principles on recognition of revenue immediately transaction is entered, accrual; aspects and the principles on the business running as a separate entity from its owners among other aspects. These are as discussed below. Historical concepts The historical concept follows that the historical prices of the assets need following during valuation of assets or the preparation of the financial statements (Albrecht, Stice, Stice & Swain, 2007, p.50). Through these historical prices, the company is in position to develop decisions in relation to predictions that rely on the prices that the company holds historically (HANIF, p.6.3). The historical concept also enables the company to evaluate assets with appropriate application of the various needs such as depreciation, amortization and other adjustments to determine the actual values of the assets hence guiding financial reposting to the right valuations. Going concern The going concern relates to the fact that a business is a progressive activity that continuous operating for an indefinite period of time (Richards, 2014). Through this principle, the company financial statements provide direction on the future of the business and the effectiveness of its operational aspects. The going concern helps one determine the continuity of the business depicted by the financials in relation to the income statement and balance sheet the presents the position of the company. Reporting standards The reporting standards need following in developing of financial statement. The reporting standards determine the disclosures that the company is in position to expose and those items that it can keep private (Mirza, 2012, p.19). Through these standards, reports that heavily relate to the financial position of the company and provide a realistic picture of the company are developed that determine the future of the company too. Through these reports, prediction on the future operation ability of the business proves possible. Failure to follow reporting standards could provide a wrong picture of the company that if relied on to make predictions of the company could provide a misleading relation. Recognition of revenues The guidelines to financial reporting also require that revenues be registered immediately the transaction occurs. The principle does not consider the type of transaction in relation to cash or credit. All transactions are recorded immediately and through these, predictions on the future collections of the business prove possible. All aspects can also play a major role in the development of forecasts on the different levels of payments received and hence guiding the development of cash flow forecasts. Accrual aspects The accrual aspect respects the fact that many business operations today involve some level of credit. Credit to the business or even credit from the suppliers. This principle registers these and provides for their recognition in relation to the treatment in the financial statements. Separate entity Lastly, the business aspect remains a separate entity from the owners and or the founders (Peroni, Gustafson & Pugh, 2008, p.2824). Legally, a business is a person on its own and requires operating as that. The statements need to reflect this and ensure that no personal aspects of the individual owners reflect on the business and in its statements. The business requires ensuring that any aspects reflecting the individual nature appear as appropriately many appearing as drawings, which reflect the personal aspects of the owners. These are strictly followed in public traded company and through these; the future of this independent entity is determinable. Conclusion In predicting the future of a business entity, the need to understand the past is inevitable. Understanding these through incomes and sales based on the income statements enable the company to develop an understanding into the future sales and make forecasts through forecasted income statement. These all prove possible due to the presence of financial statements that the company prepares and publishes. The company is also in position to understand competitor activities and the position they hold over them leading to proper investment decisions for the future of the business. It is therefore vital to have the financial statements of a company as the basis for the future. The company’s growth is predictable and easily managed leading to a positive outcome through financial statements to predict the future. Bibliography Albrecht, W., Stice, J., Stice, E. & Swain, M. 2007. Accounting: Concepts and Applications. Cengage Learning. Besley, S. & Brigham, E. 2007. Essentials of Managerial Finance. Cengage Learning. Fight, A. 2005. Cash Flow Forecasting. Butterworth-Heinemann. Financial Statements Preparation Guidelines, 2003. Retrieved from http://www.doi.gov/pfm/fs_guidance/upload/chapter1.pdf HANIF, n.d. Financial Accounting (Volume I). McGraw Hill Education (India) Pvt Ltd. Mirza, A. A. 2012. Wiley International Trends in Financial Reporting Under IFRS. John Wiley & Sons. Peroni, R. J., Gustafson, H. C. & Pugh, C. R. 2008. International Income Taxation: Code and Regulations, Selected Sections. CCH. Richards, L. 2014. The Rules Followed by Accountants When Preparing Financial Statements. Chron. Retrieved from http://smallbusiness.chron.com/rules-followed-accountants-preparing-financial-statements-17631.html Sun, J. & Lynch, D. T. 2008. Government Budget Forecasting: Theory and Practice. CRC Press. The Treasury, 2014. Preparing the Annual Report: Technical and Process Guide for Departments. Retrieved from http://www.treasury.govt.nz/publications/guidance/reporting/annualreports Read More