Who Uses Financial Statements - Part 2
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Overview of the different users of financial statements and the type of information they would be interested in.
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Glossary
Competitors Employees Government ManagementTranscript
Competitors, financial statements can also be useful to the competitors of a company. Allowing these competitors to benchmark themselves against other similar businesses. They would be able to tell how they profit margins compare, or how fast their competitors are growing, other things that might be of interest from the financial statements, are how much credit they give customers, or how much debt they use. Beyond the numbers, competitors might also be interested in the company's strategy, operations, and future plans. While this won't be captured in the numbers in the financial statements, larger listed companies have to provide a narrative surrounding the financials referred to as the management discussion and analysis, or MDNA, which highlights this information.
Government, governments are definitely interested in a company's profitability to see how much tax they'll be collecting, but they also have an interest in the company's plans and strategy, as this will determine the impact the business will have on things like job creation. Employees, people inside an organization will also have an interest in the financial statements existing and prospective employees might want to know how well the company is doing so that they have some comfort that their jobs are safe and their salaries will be paid. If a company is having cashflow problems. This could be highlighted in the financial statements. They might also want to assess prospects for bonuses and salary increases. Companies that are doing well are more able to pay these. Employees might also want to know about executive compensation and environmental, social and governance or ESG information to assess how ethical the employer or prospective employer is.
Management, while management will definitely be interested in the financial statements as they provide a good summary of the business's position performance and cash flows, and it is the picture of the company presented to those outside the organization. Remember that they will also have access to internal information in the form of management accounts to assist with their decision making. For example, which areas of the business are performing well or underperforming? Which areas should the company prioritize for growth? Where can costs be cut? Which areas of the business require more investment, and where is that cash going to come from, et cetera. There are lots of other groups that might be interested in a company's financial statements Such as environmental groups that will have a specific interest in the impact the business has on the environment and what it is doing to minimize any negative impact. This can be seen for larger entities from their ESG and corporate social responsibility reporting. These are becoming increasingly important to all stakeholders and their decision making, and for larger companies are often included with the financial statements in a company's annual report.