Almost all decisions have an impact on the balance sheet and the other financial statements.
Implementing business decisions changes the financial statements. Financial analysis will detect whether the financial strategies are or were good or bad. A wise manager will forecast the results in advance of any decision so that the future financial analysis can be analyzed!
Simple examples of Financials decisions
- Buy a new machine. Purchasing this asset may improve efficiency or expand the range. The asset will be shown on the balance sheet; the asset depreciation will be shown on the income statement / profit & loss.
- When you hire someone, the enterprise is committed to an ongoing expense (staff salaries) on the income statement / profit & loss. That has a corresponding impact on the cash flow (pay staff, pay retirement benefits) and an impact on the balance sheet (payroll tax liability, unpaid leave liability).
Often investment decisions involve a trade-off of several competing options – see Opportunity cost explained.