What Is Financial Information
Financial information refers to the summarized data of monetary transactions that is helpful to investors in understanding a company’s profitability, assets, and growth prospects. Financial Data about individuals like past Month’s Bank statements and Tax return receipts helps banks understand customers’ credit quality, repayment capacity, etc.
Financial information is like gold. Several third parties are continuously extracting information from several sources. There is a massive market for this information. The government should put strict measures regarding the handling of data. Moral laws should be in place regarding who can access this information.
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Financial Information Explained
The financial information system refers to those reports and data that give stakeholders an insight into the company’s financial performance. The stakeholders, like investors, creditors, management, employees, etc., use this information to make informed financial decisions.
The financial statements are the most important part or documents in this field. They show the assets and liabilities on a particular day, the expenses and income over a financial period and the inflow and outflow of cash in the business.
Different types of ratios are used to calculate profitability, solvency and liquidity of the business. Some of these ratios include current ratio, debt to equity, price to earning, debt to assets, return on equity, return on capital employed, etc. The company also publishes annual reports which provide a detailed overview on the current performance, the future plans and programs, the investments, capital structure and so on.
The companies operating in US need to file various documents with the Securities and Exchange Commission (SEC). These include annual and quarterly reports and some other important disclosures.
Then analysts also give information and recommendations in their reports, which helps investors decide whether to invest in such companies.
Given below are the points regarding why financial information system is used.
- Financial information is very costly data. It shows the monetary capability of individuals. So an Institution engaged in issuing loans would like to have information regarding the monthly income of persons so that they can pay the monthly installments of the loan issued. So it is used to judge the liquidityLiquidityLiquidity is the ease of converting assets or securities into cash. position of an individual or business.
- Big Credit ratingCredit RatingCredit rating process is the process in which a credit rating agency (preferably third party) analyzes a security and rates it accordingly so that the stakeholders can make their investing decisions. agencies like Moody’s, S&P, etc., rely on the Financial data of companies to produce ratings. In addition, companies engage in monetary transactions with several counterparties. So all the transactions are essential data points and must be analyzed thoroughly to understand whether a company’s credit quality is good or bad.
- For Individuals, Credit Quality is decided by the Credit Score. So to assign credit scores, rating agencies need to study the individuals’ credit history. How much loan has an individual taken throughout their life? How fast did he repay? Was there any default in payment? So all these are financial data required to make an informed decision regarding the credit score of an Individual.
- Creditors take the help of the financial information services of companies before giving credit. They usually have separate Teams who are engaged in studying this information to understand whether to give credit to any particular organization or not.
- Before investing in stocks of the company, investors extract information by reading several Financial StatementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. to predict the credit and liquidity quality of a company. This research helps investors understand whether they should buy or short the stock.
- Information like bank transactions, Credit card usage, and several other monetary transactions are being thoroughly scrutinized by the Country’s Intelligence to track and hunt terrorist activities.
- Private equity Investors study this Information on Start-Up companies thoroughly before investing in them. They buy this information from several third-party sources, and at times they request this information directly from the Start-Ups.
- External Auditors depend highly on Financial Information obtained from several sources to review whether the company’s Financial Statements reflect the correct information.
There are a lot of users of financial information services in the market as given below:
- Lenders- They are the ones who provide funds to the business. So it is very important that they are well informed about the true financial condition. The statements along with auditor’s report and market analysis provide them the true picture.
- Regulators – They are the ones who regulate the company and industry rules and keep track of the compliance procedure. The SEC is one of them, which require companies to submit reports of financial information.
- Investors – The investors need the information to decide whether to invest their funds in the business and what is the level of return that they can expect from the investments.
- Management – The company management need the information to assess the result of their policies that they have implemented, whether they are having any positive effect and also plan for future expansion and investments.
- Analysts – The research analysts are the ones who need information to assess and analyse them and find areas requiring improvement and innovation. They also give recommendations for growth.
Mr. X is planning to apply for a house loan. His age is 45. He has retired for 15 years. His monthly salary is $5,000. He plans to apply for a loan of $200,000. He uses a credit card and makes payments on time. He has successfully paid his car loan. His Bank statements show that he has, on average, maintained $50,000. How will a Financial Institution decide whether to give a loan to Mr. X?
Several data are available for Mr. X. to Say the Monthly EMI will be $2,000. So Mr. X’s Income is more than enough to cover his EMI.
Other Financial data that will help the institution to make a decision are as follows –
- Mr. X has constantly paid his credit card dues on time. So it shows the intent and capability of Mr. X. He is not a defaulter.
- Mr. X has already paid off a car loan. So he knows how to handle EMI payments. This information will help institutions understand that Mr. X is not a beginner who is applying for a loan for the first time. So Mr. X knows how to pay off EMIs.
- The Bank Statement is crucial Financial Information. It shows that Mr. X has maintained $50,000 on average. It is very helpful as it shows that Mr. X can pay off EMI from savings if there is a cash crunch in any particular month.
So the information available helped the Financial Institution decide whether or not to give housing loans to Mr. X. After going through all the information, it can be decided that Mr. X has the ability and willingness to pay the House Loan.
- Banks provide the crucial information needed to judge the credit quality of an individual or business. All the monetary transactions mostly happen via bank. So Bank statements must be read carefully to understand the financial strength and willingness to pay creditors on time.
- Financial Statements of companies provide a great deal of information regarding the Financial Stability of a company. Most of the company financial information can be extracted from their Financial Statements.
- The financial data can be gathered from its creditors and debtors also. It can be seen whether the company makes timely payments to creditors or not.
- Credit card statements can be studied to estimate an individual’s spending pattern. So this information can be found from the credit card provider.
Let us look at the benefits of using this finance related data and information in a company:
- Decision making – It helps in deciding about the current condition, the future plans and areas where improvement is necessary. Investors use them to take investment decisions.
- More accountability – It makes management more accountable to stakeholders because the information about the company performance is known to the outsiders who have interest in the company. Thus, the management aims to provide clear and transparent information which is backed by valid reasons and ideas.
- Better tranparency – Accountability leads to transparency that is necessary for gaining trust and confidence from investors, lenders and other stakeholders.
- Risk management – This is extremely important because every investor tries to minimise risk and maximise return on their investment in any company. Authentic and true company financial information helps them to manage that risk. Even the management can take investment decisions only after considering the risk of the investment for the business. These reports help in providing those insights.
- Performance improvement – Analysis, transparency, and accountability help improve the company’s performance and help in increasing profitability, liquidity, and the business’s overall health.
However, along with the benefits , it is also necessary to consider the limitations of financial information management. They are given below.
- This information is very sensitive. If it is not handled properly, a high chance of monetary fraud may arise. So it is very risky to handle.
- At times it may be misleading. It may happen that a person has defaulted for some reason in the past, but he is ready to pay off debts in the future. Having read the past Information, Institutions may decide not to give him a loan or charge him more interest. So at times, the information can be misleading.
Financial Vs Non-Financial Information
- Financial information management refers to information that involves money. Non-Financial information is any other information that can be availed of an Individual or Company and is unrelated to money. An example of Non-Financial data could be that the company was established in 2018. So it is not financial data.
- It helps to make proper judgments regarding the credit quality of an individual or company. Rating agencies read financial statements thoroughly, and judgments are made based on them.
- Value Investors read Financial Information to make informed decisions. Investors need to go through information about a company to make an informed decision regarding the prospects.
This article is a guide to what is Financial Information. We explain its users, sources along with examples, purpose, limitations & benefits. You can learn more about it from the following articles –