An online International Summer School Program on “Data, Monitoring and Evaluation” is a two-month immersive online hands-on certificate training course organised by IMPRI Impact and Policy Research Institute, New Delhi. Session 3 of Day 5 of the program was taken by Mr V. Rama Krishnan on “How to Read Financial Statements” (analysing income statements, balance sheets, cash flow statements etc). Inaugurating the session Fiza Mahajan, a researcher at IMPRI, welcomed the speakers and participants to the program with an introduction to the eminent panellists.
Importance of Financial Statements
Mr V. Rama Krishnan began the session by giving a live example from the company’s data collected by the Board of Directors. He drew a parallelism between data and management as without quality management numbers are lifeless and dry. So collecting information in terms of numbers and then depicting the analytics from the data give rise to quality management.
Then he described that financial statements provide a snapshot regarding the performance of the company as a balance sheet provides information or tells the position of the company on the particular data i.e. 31st March and these statements gave insights about the operations of the business in terms of the position of the company in terms of assets and liabilities and how much money had been invested till now and cash generated from those activities.
Moving forward he drew the comparison between cash flow and profits of the company as he mentioned that banks take into consideration profit to determine efficient functioning but he emphasised that cash flow should be taken as a primary factor to determine efficiency of the business.
Describing the purpose and use of financial statements he also mentioned the ethical code of conduct that needs to be followed while preparing financial statements else they won’t be able to generate a true picture of the company’s performance. He gave the techniques and fundamental caveats that are necessary for a successful business as a business should focus on what it has to deliver stressing the importance of the economic value of business.
He explained this very systematically, with the help of an example as if the company has borrowed a loan at the rate of 10% and has an operating charge of 1% then to survive with profits company has to generate revenue equal to 12%.
Interpretation of Financial Statements
Further, he taught how to interpret results from the numbers and data in financial statements if the company is generating profits then it is a sign for the company to invest but if suppose a company has made 10 crores profit it seems to be huge but these numbers help us understand the market position as if the company has to succeed and compete it is required to generate profits worth 15 crores. In this manner, these financial statements help in depicting results. Generating profit revenue is primarily that is determined by economic cost management, efficient process management, and effective use of assets and data plays a major role in determining it.
Moving ahead he explained the Value For Money (VFM) chain as whenever someone starts a business he has an objective that the business is going to deliver be it customer satisfaction or many others and once the outcome is cleared he has to put in resources in terms of cash, human resource, knowledge, plant and machinery etc and that account for input.
Then using these resources a product is prepared which is the outcome but to make it a business there is a requirement of a customer and if there is no customer then it is not the business. During this process balance sheet captures the relationship between resources and inputs and how economically these resources are used, the relationship between input and output is captured by the income and expense statement and the overall relationship between the capital, the cash, the input and the output is the result that is delivered by the company.
Using Financial Statements to assess the Performance of a Company
To determine a good statement in terms of Economic Value Added (EVA) that defies competitiveness and productivity, three steps need to be taken care of. What is the quality of revenue, to generate that revenue are the expenses increasing or reducing? To determine that a check has to be kept on operating cost as if revenue is increasing and operating expenses are reducing then it is good asset turnover. To support this he explained with the help of an example of financial statements of the company and stressed upon tracking the record of the company’s financial performance monthly, quarterly and then yearly.
He drew a comparative analysis using the company’s financial statements that help to provide trend and market analysis of the company and provide the loopholes and weaknesses on which the company needs to work in order to have a stable position in the market. Moreover, he told that in order to check the effective operationalisation of the company one has to look at the overall position rather than the individual items as it will then give a more realistic view of the company’s financial performance. At last, he explained the broad trends that are vital in determining a company’s performance.
The session was followed by an interactive question and answer session which facilitated a more nuanced understanding of the topics covered and cultivated critical thinking of listeners regarding the financial position of the company.
Acknowledgement: Bhanvi Bansal is a research intern at IMPRI.
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