Question.2161 - A business's financial position is not static. Assets and liabilities fluctuate every time a product is sold.What things should you look for when you look at the changing financial position in a smallbusiness? What items should you look for in your particular business? It has been said: "if a small firm is making a profit, there is no danger of its failing." Do you agree or not? Why?
Answer Below:
To know the changing financial position of a small business it is important to understand and know the value of a company. For this, the financial statement of a business is looked into. The financial statements including the income statement, balance sheet, statement of changes in financial position, and statement of changes in owner’s equity need to be checked. Even the ratio of the key relationships between the financial data like the liquidity of the business, profit made by the business, and efficiency of the business also needs to be checked and calculated. Actual result that includes the budget of the business will help to keep an eye on and maintain the financial position of the business. To keep a check on the financial position, it is also important to review the cost of the projects of the business. It is not necessary that if a small firm is performing well, then it will not fail. This is because sometimes the profit earned by the firm is not in the form of cash. It is due to the name of the firm or due to the owner’s name of the firm. Even if the products of any firm are showing a good amount of sales, it does not guarantee profit. This is because it depends on the price the products are sold at. If they are sold at the cost price or low margin, then the firm is not gaining any profit. Another case is that the extra amount received from the products sold can be considered as profit but then it should be visible in the books of accounts, only then it will be considered profit. If bills are not payable as the cash flow is used for other assets then the firm is not running into profit.More Articles From Business Management
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