Financial information serves as a vital tool for numerous stakeholders in the economy. It allows them to make informed decisions, assess financial performance, and guide strategies. Financial information is generally derived from financial statements, such as income statements, balance sheets, and cash flow statements, which are prepared by companies following accounting standards like International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). Different users of financial information have varying objectives and interests, which influence how they utilise this data. This article explores the key users of financial information and the various ways in which this information is used.
1.0 Investors
Investors are arguably one of the primary users of financial information. They provide capital to businesses in the form of equity and debt, and their primary interest is the return on their investment. Financial statements help investors assess the risk and return associated with a company’s financial performance.
1.1 Equity Investors: Equity investors, or shareholders, look at financial information to evaluate the profitability, stability, and growth potential of a company. They are interested in metrics like earnings per share (EPS), dividend payments, and return on equity (ROE). Financial ratios derived from the financial statements, such as the price-to-earnings (P/E) ratio and return on assets (ROA), provide insight into the company’s efficiency and profitability (Atrill and McLaney, 2019).
1.2 Debt Investors: Creditors or debt investors, on the other hand, are more interested in the company’s ability to repay loans. They focus on liquidity ratios, such as the current ratio and quick ratio, as well as solvency ratios like debt-to-equity and interest coverage ratios, to assess the firm’s ability to meet its debt obligations (Needles and Powers, 2013).
2.0 Managers
Managers within the organisation use financial information for decision-making purposes. Their primary goal is to ensure the company runs efficiently and effectively.
2.1 Internal Decision Making: Financial information aids managers in planning, controlling, and decision-making processes. Budgeting and forecasting, two critical aspects of internal management, rely heavily on financial data. For instance, the cash flow statement can guide decisions on when to make capital investments or manage working capital (Drury, 2018).
2.2 Performance Evaluation: Financial data helps managers evaluate the company’s performance relative to its goals. Profitability ratios such as the gross profit margin and operating profit margin allow managers to assess how well the company controls its costs and generates profits from its sales activities (Atrill and McLaney, 2019). Additionally, financial data provides a basis for setting performance benchmarks and assessing individual or departmental contributions to overall corporate goals.
3.0 Lenders
Lenders, such as banks and other financial institutions, use financial information to evaluate the creditworthiness of a borrower. The primary concern for lenders is the borrower’s ability to make interest payments and repay the principal amount. Financial information, particularly the balance sheet and cash flow statement, helps them assess the company’s financial health and liquidity (Needles and Powers, 2013).
3.1 Risk Assessment: Before extending a loan, lenders scrutinise liquidity ratios and the company’s debt structure to ensure that the borrower can meet its short-term obligations. Financial statements provide a comprehensive picture of the company’s financial stability, allowing lenders to make informed decisions on loan approvals (Drury, 2018).
3.2 Loan Covenants: Many loan agreements include financial covenants, which are conditions that the borrower must adhere to, such as maintaining a certain debt-to-equity ratio or interest coverage ratio. Lenders use financial information to monitor compliance with these covenants (Atrill and McLaney, 2019).
4.0 Suppliers and Trade Creditors
Suppliers and trade creditors also use financial information to assess the financial stability of the companies they do business with. They extend trade credit, which is a form of short-term financing, and their main concern is whether the company has enough liquidity to pay for goods and services.
4.1 Creditworthiness Evaluation: Suppliers analyse liquidity ratios, such as the current ratio and quick ratio, to determine whether the company has sufficient current assets to pay its short-term liabilities. A company’s financial health is a critical factor in deciding the terms of trade, such as the length of the credit period and discounts (Needles and Powers, 2013).
4.2 Ongoing Relationship: Financial information also helps suppliers decide whether to continue supplying goods or services on credit. If the financial statements reveal that a company is experiencing liquidity problems or is over-leveraged, suppliers may reduce credit terms or demand payments upfront (Drury, 2018).
5.0 Employees
Employees, including both current staff and potential recruits, use financial information to gauge the stability and profitability of the company. Employees have an interest in the financial health of the company because it directly impacts job security, wages, and benefits.
5.1 Job Security: Companies with strong financial performance are likely to provide better job security. A deteriorating financial situation could lead to layoffs or wage cuts. Therefore, employees monitor key financial indicators such as profitability, cash flow, and debt levels (Atrill and McLaney, 2019).
5.2 Negotiating Power: Labour unions and employee representatives often use financial information during wage negotiations. Profitability and financial growth figures form the basis of arguments for wage increases, bonuses, or improved working conditions (Needles and Powers, 2013).
6.0 Government and Regulatory Authorities
Governments and regulatory bodies use financial information to ensure that businesses comply with laws, pay appropriate taxes, and adhere to regulations.
6.1 Taxation: Tax authorities use financial statements to determine the taxable income of a business. They review the company’s revenue, expenses, and profits to calculate the amount of tax owed (Needles and Powers, 2013).
6.2 Compliance with Laws: Regulatory bodies, such as the Financial Conduct Authority (FCA) in the UK, monitor companies to ensure that they comply with legal requirements. Financial information is critical in auditing companies and ensuring adherence to industry standards, environmental regulations, and labour laws (Atrill and McLaney, 2019).
7.0 Customers
Customers, particularly in long-term contracts or critical supplier relationships, use financial information to assess the viability and reliability of their suppliers.
7.1 Supply Chain Stability: A company’s financial stability is a key factor in determining whether it can fulfil long-term contracts. Customers may review a company’s financial reports to ensure that it can sustain production or service delivery over time (Drury, 2018).
7.2 Pricing and Terms: Customers may also use financial information to negotiate better pricing or terms based on the supplier’s financial health. A strong financial position might allow the supplier to offer more favourable terms, while a weak financial position might prompt the customer to renegotiate or find an alternative supplier (Atrill and McLaney, 2019).
8.0 The Public and Media
The public, including consumer groups and media organisations, use financial information to assess how companies are contributing to society, especially in areas like corporate social responsibility (CSR) and environmental sustainability.
8.1 CSR and Ethical Practices: Increasingly, companies are being held accountable for their environmental and social impact. Financial statements, along with sustainability reports, provide insight into how resources are allocated and whether companies are meeting their CSR obligations (Needles and Powers, 2013).
8.2 Public Perception: The media scrutinises financial information to report on company performance and its implications for the economy, communities, and consumers. Negative financial results or controversies revealed in financial reports can damage a company’s reputation (Drury, 2018).
The users of financial information are diverse, ranging from investors and creditors to employees and government authorities. Each group has specific interests in financial data, which influence how they interpret and utilise this information. Financial information serves not only as a tool for making investment decisions but also as a measure of performance, a basis for regulatory compliance, and a benchmark for negotiating business terms. Thus, understanding the users and uses of financial information is crucial for effective financial management and communication.
References:
Atrill, P. and McLaney, E. (2019) Financial Accounting for Decision Makers. 9th ed. Harlow: Pearson.
Drury, C. (2018) Management and Cost Accounting. 10th ed. Andover: Cengage Learning.
Needles, B. and Powers, M. (2013) Financial Accounting. 11th ed. Andover: Cengage Learning.
