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Interpreting Financial Data

Jason LaCelle
Siena Heights University
LDR640-OA Finance + Quantitative Leadership
Dr. Stephen Ball
June 23, 2023
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Interpreting Financial Data

For individuals in a leadership role, decision making is an integral part of their job as a

leader. Some decisions require experience and intuition while other decisions may need to be

more calculated. When it comes to a company’s financial decisions nearly every shareholder and

stakeholder can be affected. After all, the success and failure of any company is measured by its

finances. Therefore, a basic understanding of financial concepts is crucial for the well being of

the company. Financial decisions require information that is accurate, reliable, and

comprehensive as possible when it comes to the companies’ investments. The more information

available to the leader the better.

Risk is inherent to any investment. Weather purchasing new equipment or stock in a

company, these investments have a certain amount of risk. A wise manager will look for ways to

reduce the risk and make these investments work for the company. To reduce the cost of

equipment, a manager can capitalize items and equipment that are used to conduct business

through a process called depreciation. This depreciation can appear on an income statement as a

non-cash expense thus reducing net income. This is because the book value of the tangible item

is reduced over time. Lower net income ultimately means the amount of taxes one will need to

pay on said income will be lower. Lower costs is good business. This reduction in taxes will be

spread out over a period of time rather than being reduced all at once. Thus reducing the risk of

purchasing new equipment.

Another investing risk is when a company decides to invest financial resources into

another company. There a many sources of information a wise manager should be able to

comprehend when making a financial decision like this. The first and maybe the most obvious

are the income statements and balance sheets. A business income statement provides a way to
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compare financial performance against comparative accounting periods. A manager can track

revenue and expenses and compare them week to week, month to month, year to year, etc. By

comparing each line item as time goes on, a manager can see a story develop as they watch sales

and expenses rise and fall. A balance sheet gives an impression of a business’s financial health.

A balance sheet can be used by investors and lenders to determine the level of investment risk of

a business. The balance sheet contains assets, liabilities, and equity information. By using the

income statement and balance sheet a manager can mitigate the risk of a new investment.

To take it a step further, there is even more nuanced data that can be inferred. By using

existing data, financial accountants can predict the outcomes of current investments. By

determining what the present value of an investment is and figuring out things like compound

interest, multiple cash flows, and the weighted average cost of capitol on the investment, one can

see what the future value of said investment will be. If one can predict the future, risk is reduced.

One other method of predicting the performance future investments is a proforma. Although I

currently do not trust the proforma as it can by manipulated by its creator either maliciously or

unintended. However, by comparing the proforma to other existing data may help alleviate these

concerns.

Upon reflection, I have learned quite a lot over the last 8 weeks. I feel like I have not just

opened the door to the world of business finance but stepped through it. I wouldn’t say that I

have entered the room, just merely stepped inside. I am very happy to be able to look at

acronyms like PV/FV, WACC, IRR and understand what they mean. As well as comprehend the

meaning of capitalize a purchase for the depreciation expense. Now I just need to find someone

else who understands these concepts and strike up a conversation.