Page 35 - IMDR MSME BOOK 2021

Managing Finance in Micro, Small & Medium Enterprises
Chapter 5
Inferential Analysis and Interpretation
Financial Health
A rm's nancial statements provide crucial information
about its nancial health. These statements are
compiled based on day-to-day bookkeeping that tracks
the inow and outow of funds in the business. Based on
the information provided by the statements the rm may
set operational and nancial benchmarks and based on
the given feedback the rm can make rational nancial
decisions and determine its overall goal.
Financial statements are useful for making capital
expenditure decisions such as expansion/replacement
of assets and further the decision to ascertain
appropriate source of nancing for the investment
decision. With the help of nancial statement, the
assessment of nancial health of the rm can be done
effectively as it also provides required information
indicating which aspects of company operations provide
the best return on investment.
To accurately evaluate the nancial health and long-
term sustainability of a rm, several nancial metrics
must be considered. Four main areas of nancial health
that should be examined are liquidity, solvency,
protability, and operating efciency.

The analysis of the liquidity helps to assess the ability of
the business to meet the current debts, the efciency of
the rm’s management in effective utilization of the
working capital and to gauge the current nancial
position of the rm. The solvency refers to the rm’s
capacity to meet its long-term obligations. Protability is
a measure of efciency with which business's operation
has been carried out. The operating efciency ensures
the control over expenses and result in desired sales