Financial Position Definition
The financial position definition the status of financial well-being regarding a company, is important to every single business. The financial position of a company is measured by the performance it takes in company financial statements: a positive and growing cash flow statement; growing profits in the profit and loss statement; and a balance of assets, liabilities, and owner’s equity in the balance sheet.
Financial Position Explanation
Financial position, explained as the leverage, solvency, and cash standing of a company which ultimately leads to the ability of the business to survive, is an important factor in large and small businesses alike. Overall, financial position summary forms the most basic aspect of accounting: assets, liabilities, and owners equity. These three factors sum the essence of the financial position of any business. This is so important that a statement of financial position has become one of the most important reports in a business.
When it comes to assets, companies have a lot to balance. They must maintain the proper amount of cash, equipment, and more. Assets, in a very general explanation, are the resources a business holds. Without resources a business, like anything else, can not survive.
In regards to liabilities, a company does not want to outpace itself. Liabilities, to explain, are obligations that a company takes on. Common liabilities include notes payable, accounts payable, interest payable, and sales payable. A business must keep just enough liabilities to be able to grow the wealth it holds while making sure not to have too many liabilities. This, formally called the condition of being “over-leveraged“, is a common path to failure.
Owner’s equity is the residual value of the company after all assets hold greater value than all liabilities. Owner’s equity includes preferred stock, common stock, capital surplus, stock options, retained earnings, and treasury stock. This measures whether the company is providing value to owners. Without that a business has no reason to exist.
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Financial Position Example
For example, Dean is a consultant with one of the most reliable firms in the nation. Specifically, Dean works with analyzing the financial position company wide, with a variety of businesses, and providing advice on how to improve it. For qualification, Dean has become a CPA, and is well trained for this work.
Dean is now attempting to overhaul a company. This, a major retail business, needs his help to turn their financial position ratios from negative to positive. As he begins his work, he sees no major problem with the business.
Dean continues his work and still sees no problems. This result perplexes him. Finally, Dean notices one problem: the company is over-leveraged. In haste, the company has taken too many loans to finance projects. While this can be a good idea for a business based on the value of cash as compared to debt, this business has taken it too far. Luckily, the company has the retained earnings to pay off their debts and better their position.
In conclusion, Dean presents his advice to the board of directors. For this, they accept him with open arms. Dean is sure that if he continues work like this, then he will have a reputation that will drive him further in his career. The statement of changes in financial position of this company will surely enhance his resume.
If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.
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