In conducting a business valuation, you need a tool that can provide a real picture of the entity to be assessed. Both historically, actual or in the nature of prediction or forward estimates. The company’s financial statements can be used as a tool, namely by summarizing the activities and results of these activities for a certain period. There are 3 types of financial statements that are most often reported, namely the balance sheet, income statement, and cash flow statement. Financial statements are very important because they can provide information that can be used for decision making. The financial statements are expected to provide information on profitability, risk, and timing of cash flow generated by the company. This information can later influence the expectations of the parties concerned, and in turn will affect the company’s value. Know more clearly about business valuations and financial statements below.
Business Valuation Factor
Business valuation is an activity to estimate corporate value that depends on an assessment of the interests, inclusion or ownership of a company. Events that usually trigger the need for a business valuation are financial statements related to taxation, transactions (including mergers and acquisitions, buying and selling, financing, etc.), litigation, divorce lawsuits, shareholder disputes, and so forth. The objects of business valuation include assets, liabilities, entities, equity, and economic interests or losses. There are several factors considered in business valuation, namely internal factors and external factors. Internal factors include:
The company’s business characteristics are assessed such as risk, return, financing, and others.
Financial statements and financial condition of the company.
Identify the value of significant intangible assets.
Relevant information related to the company being assessed such as business history, company policy, management, and so on.
While external factors include:
Influential economic conditions such as political conditions and government policies.
Specific industry conditions.
A measure of the level of corporate control.
Other market data such as returns for alternative investments, business cooperation agreements, etc.
Types of Financial Statements
There are 3 types of financial statements that are often used, namely the balance sheet, income statement, and cash flow statement. Check out the full explanation below:
1. Financial balance
Financial balance is a picture of a company’s wealth at a particular time. Because the focus is at a certain point, then the balance sheet is usually stated as a certain date. The balance sheet is divided into 2 parts, namely the left side which presents the assets owned by the company, and the right side which presents the source of funds used to obtain these assets. For each side, the balance sheet is arranged or ordered based on asset liquidity. The intended liquidity is its proximity to cash. Likewise with the right side of the balance sheet, liabilities are sorted from trade payables to share capital. An alternative to preparing a balance sheet is to place assets at the top, then liabilities and capital at the bottom. The balance sheet is based on an accounting identity that describes the balance sheet as the similarity between assets and liabilities and share capital.
2. Income statement
The income statement summarizes the company’s activities for a certain period. Therefore, the company’s financial statements are written as an income statement for the year ended December 31. Which means, the income statement will present a summary of activities for one year. The income statement is often considered the most important report in the annual report. Reported activities include routine activities such as business operations, and also non-routine activities such as the sale of certain assets, termination of certain business lines, changes in accounting methods, and so on. The definition of routine and non-routine activities depends on the type of business carried out by the company.
The income statement is expected to provide information relating to the level of profit, risk, financial flexibility, and the company’s operational capabilities. The level of profit will reflect the overall achievements of the company. Risk will be related to the uncertainty of the results to be obtained by the company. Meanwhile, flexibility is related to the company’s ability to adapt to opportunities or needs not as expected. Whereas operational capability refers to the company’s ability to maintain company activities based on a certain level of activity.