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Industrial benchmarks and standards in a very basic sense lay down the structure for operations, practices and limitations that an organisation must follow to ensure fair treatment with the customers. Regulatory compliance ensures that the organisations working in any domain are conducting business fairly and ethically. Same goes with the banking domain in United Kingdom where regulatory bodies and compliance structure ensures that the financial institutions are operating in compliance with the standards and norms. This helps the customers in getting fair and transparent services.

It is extremely important for not just customers but the society that the organizations managing funds in any form are regulated. There has to be a framework which these organisations must comply to in order to maintain trust and security among the customers. Every country has regulatory bodies to ensure that the regulations are followed.

Regulatory Bodies

Financial Conduct Authority (FCA): As the name implies it oversees and regulates the financial firms conduct of operations to ensure customer protection in the United Kingdom. Retail banking activities like lending, payment services, management of savings bank accounts and insurance services etc. are covered under the spectrum of this regulatory body.

Prudential Regulation Authority (PRA): Organisations which are responsible for handling money must be regulated by a centralized authority and that is where Prudential Regulation Authority comes into the picture. It is responsible to ensure safety and sustainability of financial institutions by setting a framework for capital requirements, doing stress test and supervising risk management practices. It sets regulations for supervision of banks, insurance providers, credit unions and major investment firms.

Bank of England:  Being the central bank of the nation Bank of England ensures financial stability by planning monetary policies, calculating base rates for various lending products and mitigating risks within the banking system by controlling various parameters that effect financial landscape in United Kingdom. To effectively apply these policies and strategies it works closely with FCA and PRA explained above to maintain financial stability for the nation.

The regulations set by the regulatory authorities provides a structured framework in which the financial organisations work. Let us get our basic understanding of some crucially important regulations.

Key Regulations:

Consumer Credit Act 1974: If we observe the process of lending, we can easily find out that most people while taking credit do not read the terms and conditions of the agreement carefully. There should be a regulation to protect people from the unjust lending practices which provides the customers to cancel the agreement if they feel it is not something they are comfortable with. Customers must have the right to know the entire details of their lending agreement as only then it would be fair for the customer to decide whether to take credit or not. And that is exactly what consumer credit act regulates by providing a transparent framework for lending activities.

 Payment Services Regulations 2017: The Payment Services Regulations paved the way for new players in the payment service market which has provided more choices for the customers to select better and innovative payment services. It has led to better data protection for customers along with the enforcing regulatory obligations enhancing transparency and accountability promoting consumer protection.

Open Banking Regulations: Open banking regulations have enabled banks with a secured way of sharing consumer data with authorized third-party fin-tech service providers. This reform has led the innovative collaboration between banks and fin- tech firms resulting in better services for the customers like account aggregation, advanced budgeting applications, and artificial intelligence enabled personal recommendations for the best suited financial product for the customers.

Impact on Banks and Consumers:

 Compliance Costs: 

Making sure that an organization is compliant with the regulations in the working domain requires a significant amount of money. Financial institutions do bear many kinds of costs in meeting the compliance requirements such as cost of setting up systems to monitor compliance of various business processes, cost of human resources involved in compliance operations, cost of tools used for analysis and reporting. If these organisations fail to manage these compliances, then they have to pay huge penalties and fines which is much greater than these costs.

 Consumer Protection: 

When regulations are enforced properly in any domain the end user in that domain is actually the one that benefits the most out of these regulations. It is simply because regulations safeguard the customers from unjust practices, deceptive terms etc. In banking domain as public money is on the line and banks or other financial institutions are lending money to the customers at interest it becomes really important to regulate the practices of these firms or banks so that the customer is getting fair and transparent service. In addition to the fairness of the services these regulations do ensure that the customers are getting crystal clear and accurate information about the financial service they are getting.

 Market Competition: 

Making standard and common regulations in the banking domain provides an operating framework which promotes competition by providing the common ground to operate for banks and other financial institutions. And in a competitive environment the businesses do evolve and everyone benefits especially the customer as the customer is getting more choices for the financial services, variety of services as the competitors do try to give the best services possible to increase their market share and in addition to these benefits the customers do get the innovative products as each competitor will come up with new innovations to try to disrupt the market.

Regulatory Data:

Number of Regulatory Actions: Data regarding the regulatory actions against the financial organisations is released periodically and publicly by FCA. A total fine of £ 785.6 million has been charged fines for misconduct, non-compliance and consumer harm in the year 2021.

Consumer Complaints: The job of receiving and resolving complaints against the financial organisations is done by Financial Ombudsman Services also known as FOS. A staggering number of 28,033 complaints were registered related to banking services and credit and 29 percent of those went in favour of the customers in the year 2021.

Interest rate is simply the percentage of the principal that you either supposed to pay or receive in a given time. Hence it is a factor that everyone must consider seriously before either making an investment or taking credit. Low interest rate selection can save you a substantial amount of money and an investment made with a high rate of interest can maximize your future profits.

Understanding the basics

The rate of interest in layman terms is percentage rate at which your principal amount will be either giving you profits or charges for the tenure decided. The interest rate can either be fixed or variable. The fixed rate remains same for the entire term of your loan or investment whereas variable rate is the one that will be varying according to market trends or fluctuations in bench marked rates.

To cater the entire demand spectrum of individuals and businesses banks and financial institutions in United Kingdom offers various kinds of interest rates which will be discussing in detail below.

 

Interest and interest rates explained - Aintree Group

 

Types of interest rates

Base Rate: In simple terms base rate is the rate calculated by the Bank of England and is used by other banks as a standard to regulate their interest charges for loans, mortgages, investments etc. This base rate is actually a standardized benchmark for the various financial institutions to set up their interest rates as it is determined by Bank of England which is a financial regulating body in United Kingdom. We can say in a simple and lucid way that interest rates of all banks and financial institutions depends on how the base rate is varying.

Mortgage Rates: As the name suggests it is just the percentage at which you get your mortgage for your property. Mortgage rates can depend on factors which quantify your eligibility for application for mortgage like loan to value ratio and credit worthiness, credit score etc. These can also vary with variation in base rate as it is the bench marking factor. Also, they can vary due to the external market factors like competition, entry of a new market leader in the sector.

Personal Loan Rates: Personal loans are basically the loans provided by the banks for customers with good credit score for various personal uses ranging from debt consolidation to large purchases. These are unsecured loans with either fixed or variable rate of interest completely depending on the bank and the offer available to the customer.

Credit card rates: Credit cards can be considered as the lifeline of credit for modern consumers. These are used for everything including groceries, travel, entertainment, education etc. These are provided to the individuals with good credit score and credit management. Credit cards can provide various benefits like promotional interest rate offers; balance transfer offers etc. in terms of interest rate benefits. Apart from these credit cards do provide the customers with cash back and benefits in getting various offers for loans if the customer is maintaining credit card really well and paying on time. The interest rates in credit card have normally two components one is the prime rate and the other is bank rate when combined together called annual purchase rate for the card. People who know how to shuffle the debt can take advantage of credit cards to the fullest.

Savings Account Rates: This is the rate of interest at which your deposited money grows in your savings account. The savings account rates may vary depending on the type of savings account you have which can be either notice accounts, easy access accounts, fixed rate bonds etc. These rates vary with the base rate, competition in the market and funding expense estimated by the bank and the various marketing strategies of the bank.

Business Loan Rates: As the name implies business loans is a lending service offered by the banks to various businesses and the rates at which loan is to be returned is simply known as business loan rate. Corporations may use these loans for fund raising, getting new machinery. Expansion of business etc. These loans rates vary in accordance with the amount of the loan, tenure of loan, creditworthiness of business etc.

Overdraft Rates: Banks usually offer overdraft service in which the customers can withdraw money exceeding than what is available in their current accounts the rate of interest that the customer should pay the bank to do so is called overdraft rate. Your overdraft rate can be affected by the type of overdraft which can be either arranged overdraft or unarranged overdraft. Sometimes there can be an additional cost associated for utilizing the overdraft along with the interest rate.

 

Exploring the Dynamics of interest rates

Changes in the interest rates effect the customers’ borrowing and saving habits which impacts profitability and competitiveness of financial institutions. If customers are aware about the factors that effect the interest rates of the financial institutions, they would be able to take right decisions regarding their debt and investments.

Base Rate Set by the Bank of England: We can say that the interest rates of retail banks are function of base rate because if base rates are changed the interest rates change. This base rate is regulated by the Monetary Policy Committee of England. The base rate is a function of various economic factors like inflation rate, projected economic growth, employment rates etc. Changes in the base rate can be used to tackle the changes in these economic factors by the central bank.

 Market Competition: Interest rates are affected by the changes in the market and the competitors. To cope up with the changes in the market and the strategic actions of competitors the banks have to change the interest rates ensure their profitability and maintain the market share. There are various characteristics which defines competition in the retail banking like technical innovation, customer service, better product differentiation. If the competitors are increasing their efficiency in these characteristics banks would have to rethink about their pricing strategies and interest rates offered.

Cost of Funds: Interest rate charged by the bank can be seen as the direct function of the cost which the bank bear in getting the funds for lending them out to the customers. Resources that bank depend on like capital markets, consumer’s deposit etc. have risks associated with them. Any change in these sources of funds will have substantial changes in the interest rates, changes like change in investor sentiment, regulatory changes, fluctuation in market rates will change the interest rates offered by the banks to the customers.

Regulatory Environment: Rules and regulations set and enforced by the bodies like Financial Conduct Authority and Prudential Regulation Authority models the operating conditions for the banks and as a response to this change banks changes their interest rates to make sure that they are profitable under these circumstances. Regulations like capital criteria, liquidity limits, consumer protection can have substantial effects on risk profiling and capital structures of the banks which in turn changes the interest rates offered by them.

Credit Risk: The higher the probability of the customer to default the credit greater will be the interest rate charged. Banks or financial institutions evaluate probability of default for a credit based on various factors like income, debt to income ratio, credit score etc. The more the probability of default the greater is the credit risk.

 

How to use these variations to your advantage

In simple words you need to minimize the interest that you will be paying for credit and maximize the return on your investment. You can easily achieve this by observing the offers and interest rates offered with them. You can do shuffling of the credit by using balance transfers and take the advantage of nearly zero percent interest rates. For money invested you can track the trends and find out which bank and which account will give maximum returns. It just takes a little analysis that you can even do a spreadsheet tool and you will be amazed by the amount that you will end up saving.

Financial ratios in simple words are the ratios which are used to estimate the efficiency of business operations, solvency of business, company’s liquidity and profitability. These ratios provide insights regarding various aspects of the business which helps the analysts and the investors about the investment prospects and the risk associated with investing in the business. Periodic review of financial ratios is essential to monitor financial health and performance of any business which makes analysis of these ratios a must have skill for business owners.

We will discuss each aspect in which various financial ratios are calculated and analysed. Majorly financial ratios are categorized under liquidity ratios, profitability ratios, solvency ratios, efficiency ratios, and market value ratios.

 

Financial Ratios are Key to Understanding Business Performance

 

Liquidity Ratios

Liquidity ratio in simple words is ratio of liquid assets to the current liabilities, if we look carefully at the ratio, we are comparing liquid assets to current liabilities and hence this metric basically tells the about the ability of a company to pay its current liabilities like short- term debt. The preferred value of liquidity ratio is above 1 as it has assets as numerator and liabilities as denominator. 

There are three major ratios which are covered under the liquidity ratio which are current ratio, quick ratio and cash ratio.

 

  • Current Ratio:

Formula: Current ratio = Current Assets / Current Liabilities

Significance: In simple words current ratio is a ratio of current assets to current liabilities. So, if a company has current assets of greater value than current liabilities it has current ratio greater than 1 and if it has current assets of value lesser than current liabilities than the ratio is smaller than one. A value greater than one for the current ratio means that the company can easily pay off current debt obligations using its current assets.

 

  • Quick Ratio (Acid-Test Ratio):

Formula: Quick ratio = (Cash + Accounts Receivables + Marketable Securities) / Current Liabilities.

Significance:  As the name suggests this ratio is called as quick ratio as it only covers the assets that can be quickly converted to cash to cover the current liabilities of a company. It is a much robust test of a company’s ability to take care of its current liabilities as it considers only the assets that can be converted to cash in a short period of time like cash, accounts receivables, and marketable securities. Hence it is also referred to as the true test of a company’s liquidity.

 

Profitability Ratios

Profitability ratios as the name suggests are the ratios which tells about the profitability which can be understood as the ability of a company to generate profit with respect to revenue, balance sheet, costs of running operations, and stakeholder’s equity for a specific time. These ratios help in estimating how well an organisation is using its assets to generate profits and value for the shareholders.

To gain an edge every business needs to how well they are performing compared to competitors in the domain and how much the business has improved in comparison to the past performance reports.

Profitability ratios are of two types which are Margin ratios and Return ratios. These ratios monitor profitability at the cost level of measurement or in terms of returns provided to shareholders.

 

  • Gross Profit Margin:

Formula:   Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue

Significance: From the formula mentioned above it can be understood as the ratio of revenue that exceeds the costs of goods sold. In simple words it compares revenue with the gross profit. Increasing gross margin can indicate that the company can charge some premium for its goods or services. Decreasing gross margin however indicates the increasing competition in the domain.

 

  • Operating Margin

Formula: Operating Margin = Operating Income/ Revenue

Significance: Operating margin in simple words is the ratio of operating income to revenue. Operating income here refers to the money left from sales after taking our costs of goods sold and operating expenses. It is an amazing indicator of the managing operations. A company with good operating margin is usually able to absorb damage in profits due to slow economy.

 

  • Pretax Margin

Formula: Pretax Margin = Earnings Before Tax/ Revenue

Significance:  From the formula mentioned above we can analyse that the Pre tax margin is the ratio of earnings before tax and revenue. It quantifies how much profit a company generates before paying the taxes to the government. It reflects the impact of management decisions as pretax margin is about the before taking out taxes.

 

  • Net Profit Margin: 

Formula:   Net Profit Margin = Net Profit / Revenue

Significance: This metric is basically used to estimate net profitability of a company as it deals with the profit after taking out every expense and taxes from the revenue. From the formula mentioned above we can observe that it is the ratio of profit to revenue for a given time period. It gives the estimate that how much profit a company makes after generating a particular revenue value.

 

  • Return Ratios:

Return ratios in simple words are the ratios used to compare total income with the assets, equity, and invested capital for a business as this comparison provides insights regarding the efficiency of a company to convert the invested capital into profit for shareholders. Return ratios are directly correlated with the capability of a business to manage investments. The capability of a business to generate returns efficiently for shareholders and investors which is quantified with return ratios drives investors and shareholders to invest capital in the business.

Return on Assets (ROA): Formula: Return on Assets = Net Profit / Total Assets

Significance: Return on assets in simple words is the efficiency of utilization of assets to generate the profit observed in a given time. It is calculated to estimate how well a company can use its assets to generate returns for its shareholders.

 

  • Return on Equity (ROE):

Formula:  Return on Equity = Net Profit / Shareholder’s Equity

Significance: This is an important metric for the shareholders as it quantifies profit earned against the shareholder’s equity. High return on equity is a good sign for investors as it indicates that the company is able to generate cash and do not have rely on debt to generate profits.

Understanding financial ratios not only helps in managing finances related to business efficiently but also provides insights regarding operations, sales, business strategy, and reputation among shareholders. Smart investors go through these numbers before making investment decisions as financial ratios describe the overall condition of a business and provide an estimate of risk associated with investing in the business.

Cash flow statement in layman terms is a statement of a company’s cash flow in a particular period. The word cash flow refers to the flow of cash into or out of the business. In simple words if flow of cash is more in to the business we can conclude that the business is financially doing well. Cash flow in to or out of a business is created basically by three mechanisms which are operations, investing and financial activities. Understanding cash flow statement is important in order to estimate liquidity, solvency of business and financial flexibility.

Financial statements provide complete information about a company’s finances. Balance sheet provides information about what a company owns and what a company owes. Income statement shows how much money has been made and how much has been spent. The cash flow statement connects the strings by actually tracking how much cash has entered and how much has left in a specific period of time.

An ideal approach to understand critical aspects of the cash flow statement would be to understand its components, analysis and impact on decision-making. We will cover each aspect in detail which enable you to conceptually understand the cash flow statement.

Key Components of the Cash Flow Statement

Cash flow statement is divided mainly in to three sections which are actually the modes in which a business can generate cash which are operating activities, investing activities and financing activities. We will cover each section starting with the operating activities.

Operating Activities

In layman terms cash flow for operating activities provides the information about where the cash is coming from and where it is going. From this part of the cash flow statement information about efficiency in utilizing the capital for business operations can be estimated.

  • Cash Inflows: Cash inflow obtained from selling goods and services, recurring amount from royalties, fee charged for services, commissions in sales or products and other cash flows which are basically obtained from business operations are included in the cash inflow due to operating activities.
  • Cash Outflows: The outward flow of cash for suppliers, business operating expenses, salary for employees, interest payments on debt, income tax etc. are included cash outflows for operating activities.
  • Net Cash Provided by Operating Activities: Net cash provided by operating activities can be calculated by difference of cash inflows and cash outflows related to core business operations. However, the most widely method is to add net income from the Income statement, adjustments in the working capital and non-cash items like depreciation.

Net cash provided = Net Income + Adjustment in working capital + non-cash items

 

Investing Activities

Cash flow from Investing activities simply refers to the cash flow resulting from buying or selling assets. Buying and selling of assets can provide a lot of information about how a business plans to expand or grow in future.

  • Cash Inflows: Inward cash flow from sale of property, plant, and equipment, sale of investments is considered positive cash flow or cash inflow from investing. Selling assets creates positive cash flow for investing activities.
  • Cash Outflows: Cash flow outward for purchasing assets like property, land, equipment, investments, and loans given to others is included in the cash outflow. Buying assets creates a negative cash flow for investing activities.
  • Net Cash Used in Investing Activities: Net cash used in investing activities is simply the difference between cash outflow and cash inflow related to acquiring or diluting any kind of asset or investment which will give returns in future. It is really helpful in estimating a company’s future moves regarding expansion and financial health. If a company’s net cash used in investing activities is negative it means that the company is investing in creating assets and if the value is positive this means that the company is selling or capitalizing on investments for strategic reasons.

Financing Activities

Cash inflow and outflow refers to the flow of cash into or out of the organisation from financial activities which include issuing equity, borrowing funds, repayments of burrowed funds, paying dividends to shareholders or repurchasing the company shares.

Net cash used in financial activities is also just the difference between the cash inflow and cash outflow due to the company’s financial activities related to the business operations and expansion.

Net Increase (Decrease) in Cash and Cash Equivalents

Net increase or decrease in cash and cash equivalents is defined as the total cash used operating activities, investing activities, and financing activities which describes a company’s overall position regarding cash for the period for which the statement is being prepared. Cash and Cash Equivalents at the Beginning and End of the Period

Cash equivalents in layman terms refer to assets that are equivalent to cash at hand. These are assets which can be converted into cash within a time period of 90 days. These include any asset that can be liquified into cash within 90 days.

Importance of the Cash Flow Statement

Liquidity Assessment

In simpler terms cash flow statement provides a complete view regarding a company’s cash flow which is directly correlated to a company’s ability of maintaining liquidity and meeting short-term obligations.

Financial Health

Cash movement is an extremely important parameter for estimating a company’s financial health. This parameter is an exclusive feature of cash flow statement and is not provided by the Balance sheet and Income statement.

Investment Decisions

Cash flow statement is the statement to which investors and financial analyst usually refer in order to evaluate a company’s financial stability and potential for growth in future to make investment decisions.

Operational Efficiency

Net cash flow from operating activities is used in evaluating the operational efficiency of a business and cash flow statement is used for this purpose. It is analysed and reviewed frequently by management and stakeholders.

Analyzing the Cash Flow Statement

Cash-Flow-statement

Cash Flow from Operating Activities

If your company is doing well in operations and is generating cash while satisfying its short-term obligations this means that you are effectively using the working capital and your cash flow is positive.

Cash Flow from Investing Activities

Negative value of cash flow from investing activities indicates that a company is investing in creating assets to plan for the future but excessive cash outflow can impact the current liquidity of a company. 

Positive cash flow from investing activities indicates that a company is actually selling assets to create cash flow and hence is a concern as any company would sell assets to maintain operations when it is not generating cash from business operations.

Cash Flow from Financing Activities

If a company is taking debt from the market or is providing equity to raise money to either finance its operations or expand its presence cash is actually coming into the company and hence cash flow would be positive.

Negative Cash Flow: Could suggest that the company is repaying debt, paying dividends, or repurchasing shares, which might impact its liquidity.

Cash goes out of the company when it is repaying creditors, paying dividends to shareholders, or purchasing its shares from the shareholders, hence the cash flow would be negative. Reducing debt improves financial health but excessive cash outflow can impact liquidity.

Free Cash Flow (FCF)

Free cash flow can be understood as the cash flow available to repay debt, pay dividends, and invest in growth opportunities after taking care of expenses. It is cash flow from operating activities minus the capital expenditures. A positive free cash flow reflects that your business is financially flexible however a negative free cash flow that you are either struggling to make ends meet or are just able to make ends meet in your business.

 

Cash flow statement is an amazing tool to evaluate operating efficiency, capital management and financial health of a business. Cash flow statement not only helps in tracking the cash flows but also helps in making strategic adjustments to ensure stability and solvency of any business. Analysing cash flow statement is must have skill whether you are an investor, analyst or a business owner.

Businesses are run in order to make profit and income statements provide a comprehensive insight about the profitability by focusing on revenue, expenses, gains and losses for a specific period. Analysing Income statement for a specific period can provide information about the efficiency of business operations, management, underperforming areas of business and business position with respect to its competitors. Income statement is also known as Profit and loss statement. Understanding what income statement is, how it is made, what impact it has on business can help in strategizing operations and increase profitability. 

Key Components of the Income Statement

1. Revenue (Sales)

  • Gross Revenue: Gross revenue is the total money a company has made in a particular period before subtracting expenses by providing goods and services to the customers and clients.
  • Net Revenue: Net revenue is gross revenue minus the returns, refunds and discounts. It is what a company has actually made.

 

2. Cost of Goods Sold (COGS)

Cost of goods sold (COGS) is the net cost associated with producing goods or delivering services like raw materials, labour costs, manufacturing overheads, service management costs etc.

The formula for COGS is: 

COGS = Starting Inventory + Purchases – Ending Inventory

 

3. Gross Profit

Gross profit in layman terms represents the net profit and is an indicator of efficiency of a company’s production and sales. It is calculated as a difference between cost of goods sold (COGS) and net revenue.

Gross Profit = Net Revenue – COGS

 

4. Operating Expenses

The expenses in maintain day to day operations is called Operating expenses these expenses include:

  • Selling, General, and Administrative Expenses (SG&A): These expenses include staff salary, office utilities, rent for office space and marketing expenses.
  • Depreciation and Amortization: These are the expenses allocated to the non- tangible assets during the time of their use. It is a very important aspect while considering operating expenses as most people miss out on these expenses.

 

5. Operating Income (EBIT)

Operating Income which is also known as Earnings before interest and taxes (EBIT) is an excellent metric to measure a company’s profitability in its core business operations it is simply the difference between operating expenses and gross profit for a particular period.

Operating Income= Gross Profit – Operating expenses

  • Non-Operating Items –These include all expenses and revenues which are not linked with to the core business operations such as interest income, debt interest expense, gains or loses from investments not related to the core business.
  • Pre-Tax Income –
    • As the name suggests it is company’s oncome before the taxes are taken out.   Mathematically pre-tax income is operating income plus the non -operating items for the business.
    • Pre-Tax Income=Operating Income + Non-Operating Items
  • Income Tax Expense –It is the amount of tax a company pays based on its pre – tax income.
  • Net Income
    • The most important metric to evaluate a company’s financial health is Net Income. In layman language it is a company’s profit or loss after taking out all deductions including expenses and taxes from total revenue.
    • Net Income=Pre-Tax Income−Income Tax Expense

Importance of the Income Statement

  • Performance Evaluation: Evaluating performance of a company means measuring its profitability and operational efficiency. It is very important for the stakeholders and investors to review a company’s performance before making the important decision to invest in the cause and that is where Income statement is really useful as it provides the clear picture about profitability by calculating a company’s net income.
  • Decision Making: The benefits of precise analysis of income statement are not limited only for the investors to assess risk associated with the investment. Income statements are really useful to decide whether to go for expansion or cost- cutting. If execution of an existing operating strategy is not generating satisfactory results it will be reflected in the income statement and strategic changes can be made accordingly to the operations to generate more satisfactory results.
  • Financial Planning: Budgets are created by using the forecasted data which is again based on analysing past income statements. The future budget is a reflection of expected future performance which can be efficiently predicted by using income statements. Hence analysing income statement in essential to create an effective budget which aligns with the financial goal of the organisation.
  • Compliance: It is mandatory for a public company to maintain transparency and compliance with the financial reporting standards. Hence it is an essential requirement for the public companies to file income statements with regulatory bodies.

Analyzing the Income Statement

  • Trend Analysis: Income statement can be used to analyse trends by doing a comparative analysis over multiple periods find trends in revenue, expenses and profitability to highlight the areas which are showing improvement and to find areas which require improvement.
  • Ratio Analysis: Income statement is the key source to calculate financial ratios like gross profit margin, operating margin and net profit margin. By getting insights about these important ratios strategic changes can be made to improve efficiency and performance of the business.
  • Comparative Analysis; Comparing the income statement with the industry competitors enables the business to do efficient and effective benchmarking regarding business performance. Not only in benchmarking income statement also helps in identifying competitive strength and weakness of business as compared to competitors.
  • Segment Analysis: Income statements when broken down as per the business segments or product lines can reveal which segments or product lines are profitable and which segments or lines require improvement.

Conclusion

Analysing Income statement reveal the complete picture regarding a company’s operations and financial health. It is not important for only for the purpose of improvement in operations but also for the investment purposes. Analysing Income statement is crucial also for doing the fundamental analysis of the company before making the decision to invest in its stock. Therefore, analysing income statement is a must have financial skill for everyone.

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