Types of Stakeholders
There are stakeholders in the business world, just like in every sphere of human endeavor. A stakeholder is any individual or entity interested in the outcome of an event or a given situation. Stakeholders play critical roles in the success of an event, and the result impacts these stakeholders. Some stakeholders are interested in a company’s corporate financial performance. Shareholders, lenders, trade creditors, investors, employees, and analysts are among them. Others include regulators, credit rating agencies, and trading partners.
Focus of the Different Stakeholders
A company’s financial statements serve different purposes for these entities. For shareholders, the need to make informed decisions about their equity is why they need to evaluate their company’s financial statements. Every business owner should know how much short-term and long-term financial obligations are at stake. They need to understand how liquid their company is and decide on what next move is best for the company’s management. Shareholders use the financial statements to calculate the profitability ratios, efficiency ratios, and liquidity ratios, to mention a few.
Creditors are interested in companies’ financial statements to ascertain the ability of the companies to pay for goods and services. No one wants to give goods and services to customers who do not have the means to pay. Creditors want to know if a company represents a reasonable credit risk or not. The creditors can evaluate details like income, expenses, profit, and cash flow from the financial statements. When the cash flow is not good enough, creditors could be hesitant before engaging a company. With the financial statements, creditors can decide whether a company is creditworthy or not.
Like the case of shareholders, potential investors also need to evaluate a company’s financial statements before investing. Savvy investors assess the profitability, efficiency, liquidity, and returns on a company’s equity before investing in the company. Investors use the financial statements to decide which company is a suitable investment for their capital.
Lenders understand the importance of analyzing a company’s financial statements before providing facilities. Accordingly, they use the financial statements to assess the financial solvency of a company and the level of risk associated with lending to the company. Therefore, they will review dividend payments, solvency, profitability, cash flow, and leverage trends.
To increase employee involvement in the operations of a business, the management of a company can share the financial statements with their employees. This opportunity provides access to critical details and reveals the business’s health status to the employees. Aside from shareholders, lenders, creditors, and potential investors, the management of a company needs to be fully aware of the financial statements of their business. Managers are significant stakeholders and decision-makers, so they must always be mindful of the conditions of their companies.
Regulator and Credit Rating Agencies as a Stakeholder
The various regulators of banking sectors constantly monitor the financial performance of their supervised banks. This is achieved by frequent electronic submissions of economic data by the banks to the regulators. The supervising regulators assess vital metrics such as liquidity ratios, capital adequacy, etc., to ensure they are well above the statutory levels.
Large companies frequently require credit ratings to raise debt financing or benchmark themselves to other organizations. Accordingly, they engage credit rating agencies to review their financial statements and additional critical corporate information to assign ratings to the companies.