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.
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.
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.
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.
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.
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.
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.
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.
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.
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 –
- Financial Statement Limitations
- Objectives of Financial Statements
- Limitations of Financial Statement Analysis
- Financial Statement Examples