There are multiple users of financial statement that range from internal employees to potential investors. Although, the use of financial statements differ for different stakeholders. However, they all require management to produce reliable financial statements with no material misstatement.
Alos read, Elements of financial statement
Here are some of the users of the financial statement.
Business management – Business management needs to assess the financial performance and status of the business in terms of profitability, liquidity, efficiency, cash flow, and other business factors. Accurately presented financial statements help identify the factors to improve and plan activities for the future.
So, the management of the business uses the financial statement to make strategic and operational decisions.
Business suppliers – Suppliers use financial statements to assess if they should allow credit to the business. What should be the credit limit and other terms? Suppliers assess business background and liquidity to assess the recovery of their balance.
So, suppliers seem to be interested in areas of cash flow, liquidity, and business ability to repay their funds on time. Hence, they use the financial statements to collect information relevant to their use.
Taxation authorities – Tax authority/Government needs to assess the amount of tax to be charged from the business. Calculation of the profit is one of the judgmental business areas as the accrual basis of accounting is about using some subjective concepts. For instance, deferred tax and provisions can be subjective areas of profit calculation.
Hence, taxation authorities expect businesses to produce reliable financial information as they need to rely on them.
Lenders – Lenders have a direct financial interest in the business, and they use financial statements to assess if the business is profitable and liquid. Profitability is assessed to determine if the business will pay their interest which is the main reason for funds disbursement. So, if the business is profitable, creditors are expected to feel at ease for approving the loan request.
Similarly, liquidity is an important business aspect for the creditors as they also need to recover their funds.
Potential investors – Investors need to assess the business’s financial performance before assessing the rate of return. Equity investors are more exposed to the risk of loss as they are only paid if assets are left after paying to the lenders.
So, investors use financial statements to assess the business potential to generate a return on their investment.
Competitors – Competitors use the business’s financial statement to get an idea about the strategic move of the business. Although, that’s not the desired use of the financial statement by the business.
Customers – The customers use a financial statement to select the suppliers. However, that’s most likely when they want to enter into a long-term contract with the suppliers or source some key material/services. So, customers can also use business financial statements to decide if they want to work with the business in the long term.
Labour union – Labour union uses financial statements to assess ability of the business to pay off the compensation to the laborers. They can assess by reviewing financial statements in terms of profitability and liquidity.
Rating agencies – Rating agencies use the financial statement to update the rating of the business. They are more concerned about business attitudes with the suppliers and service providers in terms of payment.
Investment analyst professionals – Investment analysts use financial statements to analyze the business’s current and expected performance and its impact on the share price of the business. Based on this information, they provide investment consultancy.
Employees – Sometimes, companies encourage employees to read a financial statement; it’s expected to enhance their involvement in the business.
Internal auditor – Internal auditors aim to identify operational and financial risk. This risk identification is assisted by business understanding, which can be enhanced by thorough review of the financial statements.
There are different users of the financial statement ranging from internal employees of the business to potential investors. The use of the financial statement includes but is not limited to management, tax authorities, lenders, competitors, investors, rating agencies, employees, internal auditors, employees, and investment analyst professionals, etc.