Financial Statements for Business Valuation!!!!

Financial statements are the reflection of the business performance. The profit and loss statement and the balance sheet and even the cash flows form part of the financial statements. The Profit and loss statement helps to know the profit or loss of the business enterprise. The balance sheet shows the assets held and liabilities owed by the business. And the Cash flow statement helps to assess the working capital of the business. For any business valuation each of these financial statements plays an important role.

Business valuation means to find the financial value of the enterprise. This is done for a multiple purposes like mergers and acquisition, purchase-sale of business, loans, partition etc. While valuing the business, primary reliance is placed on the profit and loss statements whereby the profitability is known and various rations like Net Profit, Gross Profit etc are used for better valuation. Also the balance sheet is used to know the assets and liabilities along with ratios like current ratio, acid test ratio are used for valuation. Three ways are used in business valuations which are as follows:

• Asset Approach
• Market Approach
• Income Approach

Each of these approaches has its own way of valuing the business wherein the financial statements are used. For assets such as land and building generally the market value approach is used. For assets such as plant and machinery, the depreciated value is used. When the financial statements are used- they are not used for a single year but for multiple year to find out the true value of business by discounting the real cash flows with relevant interest rates. Not only this the value of business also capitalized to find out the value of goodwill of the enterprise which in turn is added to said value of business to find out the actual value of business. Financial statements are a boon for valuation as the businessmen can have a clear idea of how the business has performed and hence he can take a wise decision on the basis of financial statements.