Financial positions are comprehensive statements of financial health for either individuals or corporations. A financial position is more than just how much money a person or entity has. It is a reflection of overall investments, including debts, assets, and future liabilities. Financial positions are generally calculated and scrutinized before companies enter into merger or acquisition agreements. They are also invaluable for individuals looking to diversify their own investment portfolios or better understand their individual financial standing.
The main point of a statement of financial position is to paint a broad picture of how much a company or person is actually worth. Financial positions reflect both actual and realized money. Actual money is cash that is sitting in a bank account or money market account and is easily accessible. Realized money is tied up in stocks, loans, fixed assets, or long-term investments.
Totaling actual and realized worth is only the first step. Any debts, operating costs, or loan liabilities must be also subtracted. The result is a comprehensive statement or report outlining not only the company or person’s overall wealth, but also breaking down exactly how that wealth is derived, as well as how it is distributed, saved, or spent.
Financial positions are commonly used in financial planning, especially among individual investors. Assessing an individual’s financial position is a good way to determine problems in investment structures, or strategies for future asset growth and portfolio expansion. Financial planners usually begin counseling sessions by determining the precise financial position of a client.
Individual financial positions are typically calculated by taking stock of all checking and savings accounts, all stock and bond holdings, and the current value of assets such as houses and cars. The calculation is only interested in immediate values, not in original price paid. Cash value of insurance plans, particularly life insurance, also factors in, as do the value of any retirement plans or expected pensions. All of these fall under the “assets” portion of a financial worksheet.
Liabilities are also a crucial part of creating financial position statements. For individuals, liabilities include debts, loans, and expected tax bills. Mortgages, credit card balances, and student loans are among the most common entries in this category. Other fixed expenses, such as charitable contributions, tuition payments, or insurance policy premiums, should also be included.
This same process of weighing assets versus liabilities is used in calculating a company’s financial position, though the figures are often much more complex. Gross profits, fixed assets, and corporate stock holdings must be balanced against all expenditures, short and long-term debts, and tax liabilities. National and international transactions must be reconciled, and every overhead expense must be broken out and categorized.
Corporate financial positions are very important for a number of reasons. A company’s executive leadership needs to have a complete picture of the current financial standing in order to make decisions about future investments and expenditures. Investors usually also demand a professionally-prepared statement of financial position before deciding whether to buy stock or invest long-term in the company. The financial analysis that goes into position reports is generally much more comprehensive than the information that is provided in corporate memos, annual reports, or official prospectus material.
