Top 10 Most Common Users of Financial Statements
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. 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 listed below:
- Management of the Company
- Government and Government Agencies
- Investment Analysts
- Rating Agency
Let us discuss each of them in detail –
#1 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 liquidityPerspective Of LiquidityLiquidity 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., 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 salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. 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 looking at the statements.
#5 Government and Government Agencies
Government agencies like the Income-tax department, the sales taxSales TaxThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company's welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%). 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.
#7 Investment Analysts
Investment analysts keep a close eye on the financial statements of the company. They have the good industry knowledge and be updated about how the company is performing. Based on their analysis from the financial statements, the investment analystsInvestment AnalystsAn investment analyst is an individual or firm that excels in the financial and investment research and have a keen knowledge of financial instruments and models. Such financial professionals include portfolio managers, investment advisors, brokerage firms, mutual fund companies, investment banks, etc. 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.
#9 Rating Agency
A credit rating agency reviews the financial statement of the company to give credit rating to the debt instruments of the companyDebt Instruments Of The CompanyDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans.. 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.
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.
This has been a guide to Users of Financial Statements. Here we discuss the Top 10 Users of Financial Statements, including Investors, Customers, Competitors, Employees, and Rating Agencies, etc. You can learn more about financing from the following articles –