How and why would a manager would want to choose and recommend business alternatives using financial statement analysis?
A manager might want to choose and recommend business alternatives using financial statement analysis for a few reasons. By examining the company's financial statements, a manager can gain insights into the company's financial health and performance. This analysis helps them understand how different alternatives may impact the company's profitability, liquidity, solvency, and overall financial position.
To choose and recommend business alternatives using financial statement analysis, a manager would typically follow these steps:
1. Gather financial statements: The manager would start by obtaining the company's financial statements, including the income statement, balance sheet, and cash flow statement.
2. Review financial ratios: The manager would calculate and analyze various financial ratios derived from the financial statements. These ratios can provide insights into the company's profitability, liquidity, efficiency, and leverage.
3. Compare alternatives: The manager would then assess multiple business alternatives, such as investment opportunities, expansion strategies, cost-cutting initiatives, or product line changes. They would evaluate the potential financial impact of each alternative by analyzing how it affects important financial metrics.
4. Consider risk and return: In addition to financial metrics, the manager needs to consider the risks associated with each alternative. Higher-risk alternatives may offer higher returns but also come with greater uncertainty. Therefore, an analysis of risk and return trade-offs is crucial for making informed decisions.
5. Make recommendations: Based on the financial statement analysis, the manager would identify the most viable alternatives that align with the company's strategic objectives and financial goals. They would then present their recommendations to key stakeholders, such as executives or board members.
By using financial statement analysis, managers can make more informed decisions, evaluate the financial implications of different alternatives, and justify their recommendations based on objective data. Ultimately, this helps enhance the company's financial performance and competitiveness.