In continuation of my knowledge-sharing experience, I will like to further drop for reference – The USERS OF FINANCIAL STATEMENTS.
FINANCIAL STATEMENTS prepared by the Companies are used by different categories of individuals, corporates in a sense relevant to them. The most common users to the financial statements are explained below:
Management of the Company
The management of the company is the first and foremost user of the financial statements. Although they are the ones who prepare the financial statements, the board and the management need to refer to them while considering the progress and growth of the company. The management of the company looks at the financial statement from the perspective of liquidity, profitability, cash flows, assets and liabilities, cash balances, fund requirements, debt to be paid, project financing, and various other days to day operational activity. Simply put, the management of the company needs financial statements to make decisions about the business.
Investors are the owners of the company. They would like to understand and kept updated with the financial performance of the company. They would like to make the decision based on the financial statement, whether they need to keep invested or move out of the company based on its performance.
Customers need to view the financial statements of the company from which they are procuring goods or services. Big clients would like to have a long-term partnership or contract with the company; thus, they would like to work with a company that is financially stable. Further, a financially strong company can provide its customers with credit sales and can deliver products and services at a discount than the market.
Competitors would like to know the financial status of the competing company. They would like to maintain a competitive edge on their competitors and hence, would like to know the financial health of the other company. Further, they could decide to change their strategy by looking at the statements.
Government and Government Agencies
Government agencies like the Income-tax department, the sales tax department, would like to go through the company’s financial statements to keep a check if the company paid appropriate taxes. They would like to make future tax predictions based on the performance of the company and industry practices.
Employees look at the financial statement of the company from different perspectives. They would like to know if the company is doing as their bonus and increments depend on the financial performance of the company. Also, they would look to have a deep understanding of the business and the current industry situation, which will be available in the financial statements. The company may choose to involve employees in decision-making; hence, it would like the employees to know and understand the financials of the company.
Investment analysts keep a close eye on the financial statements of the company. They have good industry knowledge and be updated about how the company is performing. Based on their analysis from the financial statements, the investment analysts decide whether to recommend the stock of the Company to their clients or not.
lenders like traditional banks, financial institutions, creditors would like to check the ability of the company to pay the debt. Thus, they go through the financial statements of the company and see if they would provide a loan.
A credit rating agency reviews the financial statement of the company to give credit rating to the debt instruments of the company. The issuing company has to provide all information to the credit rating agency to get a rating of the securities it is issuing to raise funds. The investors of these securities can make an informed decision once a rating agency has provided a rating, which is based on the financials of the company.
Suppliers like the customers would like to deal with companies that have good financial health. Thus, they are also users of financial statements and make decisions to provide credit to the company.
The financial statements of the company are the most important information about the company. It gives a clear picture of the financial affairs of the company, its performance, which can be compared with the competitors and peers. Thus, various users, as discussed in the article, read and understand the financial statement of the company for their purposes.