Who are the users of financial statements explain the information they require from financial statements?

If you want to know how a business is performing, financial statements provide the answer. Is there enough cash in the bank to pay the bills? Is the company making money? Have the assets been swallowed up by debt? The users of financial statements such as the balance sheet include people both inside and outside your company.

Because so many people rely on financial statements for information, federal regulation, and generally accepted accounting principles (GAAP) have standardized the formats. One big difference between internal and external users' statements is that financial statements for external use must fit these standard formats. If internal users such as your company's management or owners want information, you can use any format that works for them, or you.

The essential financial statements are:

  • The income statement, which shows how much revenue you took in, and how much money you spent. It includes money earned but not paid to you, and money you owe but haven't paid. This statement provides a sense of how profitable the business is.
  • The cash flow statement, which looks at how much money changes hands. This knowledge is important because you can have a profitable company that can't pay its bills if customers don't pay quickly enough. If you operate on a cash basis, cash flow equals income.
  • The balance sheet is like an equation with one side of the equal sign comprised of your total assets, and the other, your total debts and the owners' equity. This statement shows how much the company is worth over and above the debt load.
  • The supplemental notes cover various technical points and details that give perspective on the big three.  

Internal users of financial statements fall into three main groups: management, owners and, sometimes, employees. In many small businesses, the owners are the managers. The key users of financial information in a partnership, for instance, are usually the partners themselves.

  • Managers are the primary users of financial statements because they need the information to do their jobs. They have to make decisions such as whether to add debt or how to maintain cash flow. Making those calls requires detailed knowledge about company finances.
  • Owners can use the statements to evaluate whether their investment is safe and whether the company is providing an acceptable return on their money. 
  • Some employees, such as accountants or the finance department, are users of financial statements because it's part of their job. If other employees have access to the information, it can help them judge whether the firm is in good shape or if it's time to jump ship.

Because those in management have to make decisions for the business, they need different information than other internal users of financial statements. For example, they may want income statements for each product line or store rather than for the business as a whole.

If someone wants to know about your finances but isn't part of your business, they're external users of financial statements. They fall into many more categories than internal users of financial statements:

  • Lenders. If you want money from the bank, they're going to want to see your financial data first.
  • Regulators. If you're a publicly traded corporation, you'll have to send the Securities and Exchange Commission copies of your statements.
  • Outside investors. Like lenders, stockholders and venture capitalists will want to review your statements before they write you a check.
  • Creditors. If you owe money or you're slow paying your bills, your creditors may want to double-check your statements. Suppliers may review your financial health before deciding to extend credit.
  • Unions. If your cash flow and income are steady, the union may decide you can offer a more generous employment package. 
  • Publicly traded companies' financial statements are public information. Anyone who takes an interest in your business may become an external user. That could include customers, competitors and the media.

Who are the users of financial statements explain the information they require from financial statements?

Definition of Users of Financial Statements

The financial statements that include a balance sheet and income statement are prepared by the companies to know the financial position of the company and such statements that are prepared and published by the company is used and evaluated by various individuals and entities that are associated with that company or have some kind of interest in the company such as lenders, investors, management, customers, vendors, etc. and these parties are known as the users of the financial statements.

Explanation

The users of the financial information are the ones who read the financial statements of the company because they have an interest in the company directly or indirectly. These people can be internal or external where the internal users are those that are the part of the management of the company such as managers and other professionals whereas the external users are the outsider to the companies but have some kind of interest in the companies such as shareholders, lenders, creditors etc. These users are very important for the company because without these users it is not possible for any company to survive in the market because they are the source of raising funds and getting business so the financial statements should be published and made in a form that is understandable to all such users.

Top 12 Uses of Financial Statements

The different users of the financial statements are:

1. Investors & Shareholders

The investors and shareholders are the owners of the company so they require the financial statements to check the profitability of the business and the company’s overall financial position so that they can analyze the return that they are getting on their investment in the company. With the presence of financial statements, they decide whether to invest more in the company if the company is giving good returns or divest their funds from the company if they feel that the company lacks to earn adequate profits.

2. Lenders

The lenders are the ones who lend money to companies such as financial institutions including banks and NBFCs. These lenders analyse the financial position of the company before giving funds to that company to see whether the company is in the position to repay the funds and finance cost on time. Before disbursing loan to any company the vendors ask for the financials and the projected financials too so that they can analyze if their debts are secured and the chances of debts getting bad is very low or negligible.

3. Vendors

Vendors are the suppliers who supply something like raw material or other goods to the company that the company needs in their day to day operations. Just like the lenders, even the vendors need to check the repaying capacity of the firm to whom they are selling their goods but they are more interested in analyzing the short term repaying capacity of the company as their lending period is in the months.

4. Customers

The customer is the person to whom the company sells the finished goods. Even the customers are interested in the financial statements of the company from which they are purchasing the materials that is important for running their business. Generally, the big companies are interested in doing business with the parties who can supply goods for long period so before entering into contract they analyse the stability of the company. Also, the customers go for the companies that can give them credit period which also they analyse from the financial statements.

5. Management of the company

The management people are the first ones to use the financials of the business. They need the financial statements to see the profits/losses of the business and also company’s cash flows and liquidity position so that they can take major decisions involving financial and operational decisions for the development of their company if they think the strategy of the competitor is more efficient than their strategy.

6. Employees

The employees are the ones who are employed by the companies and in return they get salaries. These people are interested in knowing the financial position of the business to check if their future is secured in the company and the company will pay off the salaries on time with bonuses and the amount of performance appraisal.

7. Government

The government bodies especially the authorities of the income tax department are interested in the financial position of the business for taxation and other regulatory purposes. Every company is required to pay taxes at a certain percentage to the government authorities. So the amount of taxes payable is calculated after the preparation of financial statements.

8. Competitors

The entities that are the competitors of the business also use the financial statements of the company so that they can evaluate the financial statement of the competitor and know their strategy so can they can also update their strategies if required.

9. Rating agencies

The credit rating agencies that give credit ratings to the company according to their financial position are also required to see financial statements as on the basis of such financial statements they give ratings to the companies.

10. General public

The general public is also interested in the financials of the company which includes analysts, students for their education, researchers who sometimes need the data while performing surveys or any other research, etc.

11. Union

The union also needs the data as they want to check the company’s ability to pay off the compensation and other benefits to the members of the union.

12. Investment Analysts

The investment analysts also keep a check on the company’s financial statements. They are always updated with the performance of the companies because they need to give investment advice further to the clients.

Conclusion

Thus, the users of the financial statements are the ones who have an interest in the financial statement of the company. They are insiders as well as outsiders. The financial statements are used to analyze the financial position of the company i.e. the company’s ability to stand in the market and it’s earning potential. The companies are required to publish their financial statements with full disclosure that are useful for such users.

This is a guide to Users of Financial Statements. Here we discuss an introduction to User of Financial Statement with top 12 Users explained in detail. You can also go through our other related articles to learn more –