For any organization, proper financial management is key to
ensuring the company’s growth, profitability, and long-term sustainability.
A crucial aspect of financial management is conducting regular financial
analyses, which provide an insight into the organization's overall financial
health. Of the two primary financial statements, the balance sheet and the
income statement, a balance sheet is the most suitable option for analyzing
the specifics of credit extension towards suppliers.
In this case, if a financial analysis is to be conducted with only one form
of the financial statement, a balance sheet should be used. An income
statement might provide information about current income and expenditures,
but it presents an incomplete picture of the organization's financial
health. On the other hand, a balance sheet provides a detailed overview of
the organization's assets, liabilities, and equity. It thus creates an
overall financial profile of an organization, its sustainability, and its
capacity to engage in credit extension risks.
When considering credit extension towards suppliers, a balance sheet is
particularly relevant because it takes into account the organization's
current liabilities. Payment extensions granted to suppliers are a form of
loan and are therefore categorized under the "liabilities" term in the
balance sheet. The delicate balance between liabilities, assets, and
indicator performance should be taken into account when estimating the state
of the firm’s account. The balance sheet analysis provides a comprehensive
view of the organization's ability to extend credit and meet its obligations
without adversely affecting its financial health.
Additionally, balance sheets offer a snapshot of an organization's financial
health, making it easy to assess its financial position at any given time.
This feature is particularly useful for financial managers who need to make
quick decisions, such as determining whether to extend credit to a supplier.
Conducting a balance sheet analysis allows responsible financial managers to
determine whether a society can or should extend credit to one of its
suppliers.
In conclusion, financial management is a critical aspect of any
organization's success, and conducting financial analyses is an essential
part of that management. If only one form of the financial statement is
possible, a balance sheet analysis is the most appropriate option for
assessing an organization's financial health, particularly when considering
credit extension towards suppliers. It provides a comprehensive view of the
organization's assets, liabilities, and equity, giving an overview of its
financial profile, sustainability, and capacity to engage in credit
extension risks. Therefore, regular balance sheet analyses are necessary to
ensure the organization's growth, profitability, and long-term
sustainability. |