Financial Information Meaning
Financial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.
Purpose
- Financial Information is a 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 shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.read more 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.read more agencies like Moody’s, S&P, etc. rely on the Financial data of companies to produce ratings. Companies engage in monetary transactions with several counterparties. So all the transactions are essential data points and need to be analyzed thoroughly to understand whether the credit quality of a company is good or bad.
- For Individuals, the Credit Quality is decided by the Credit Score. So to assign credit score, rating agencies need to study the credit history of the individuals. How much loan has an individual taken throughout its life? How fast did he repay? Was there any default in payment? So all these are financial data that are required to make an informed decision regarding the credit score of an Individual.
- Creditors take the help of financial data 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.
- Investors, before investing in stocks of the company, 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.read more to predict the Credit and liquidity quality of a company. This research helps investors to 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 are reflecting correct information.
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For eg:
Source: Financial Information (wallstreetmojo.com)
Example
Mr. X is planning to apply for a house loan. His age is 45. He has retirement until 15 years. His monthly salary is $5,000. He plans to apply 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?
Solution
There is several data available for Mr. X. 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 to 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 a 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 also in case there is a cash crunch in any particular month.
So the information available helped Financial Institution to 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 as well as the willingness to pay House Loan.
Sources of Financial Information
- 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 as well as 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 information of companies can be extracted from the Financial Statements.
- Financial data of a company can be gathered from its creditors and debtors also. It can be seen whether the company makes timely payment to creditors or not.
- Credit card statements can be studied to estimate the spending pattern of an individual. So this information can be found from the credit card provider.
Financial vs. Non-Financial Information
- Financial Information refers to information that involves money. Non-Financial Information is any other information that can be availed of an Individual or Company and is not related 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. Financial Statements are read thoroughly by rating agencies, 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 of the company.
Disadvantages
- This information is very sensitive. If it is not handled properly, then high chances 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 give him by charging more interest. So at times, the information can be misleading.
Conclusion
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 measurements regarding the handling of Information. Proper laws should be in place regarding who all can have access to this information.
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