Introduction
Financial statements are accounting reports that are useful in drawing a complete picture of an
organisation’s financial position and performance of an organization. They summarise what the
business owns in form of assets and what it owes to its creditors and liabilities. Various
stakeholders, both internal and external, rely on financial statements to make informed decisions.
Below is a discussion on the five major users of financial statements, explaining their needs and
how they utilize these documents.
1. Management
Management personnel represent the primary users of financial statements. Management like
financial risk officers, controllers, directors and CEOs among others comprise these internal
users of these reports. Management primarily use statements like the balance sheet and income
statements to make strategic decisions that affect the direction and performance of the company.
For example, to the income statement is often useful in performance monitoring. This is done by
assessing how well the company is performing relative to its goals by analysing the net profit
arising from operating activities.
Secondly, the balance sheet helps management in budget planning and resource allocation. By
understanding the assets and liabilities, management can make informed decisions about
investments and financing options. Lastly, the detailed information provided in the income
statement allows management to identify areas where costs can be reduced, thereby maximizing
profit.
2. Regulatory Authorities
Regulatory authorities such as ZIMRA (Zimbabwe Internal Revenue Authority), securities
regulators like the Securities and Exchange Commission of Zimbabwe (SECZim), and other
government agencies use financial statements to ensure that companies comply with laws,
regulations, and accounting standards. These regulatory bodies use financial statements to verify
that a company is adhering to tax laws through an exhaustive auditing process. For example,
ZIMRA authorities rely on income statements and balance sheets to ensure that the correct
amount of tax is being paid. Failure of a firm to reach its tax obligations will attract penalties or
worse incarceration if financial malpractice is serious.
Regulators also enforce the uniformity of reports through the use GAAP or IFRS and ISA
standards to make audits easier and increase transparency of business operations to stakeholders.
For example, in the United States the Sarbanes-Oxley Act of 2002 (SOX) was enacted to restore
investor confidence by improving the accuracy, transparency, and reliability of financial
reporting after the Enron scandal.
3. Investors
As stakeholders of the business, shareholders benefit from well formatted and accurate financial
reports. Statements like the cash flows reports allow them to analyse and project potential future
earnings of a firm thus determine the return on their investments. Income and statements of
financial position draw a picture of the fiscal year and informs them on how operating and
inventions activities performance affected their share dividend earnings.
By analysing growing debt and shirking working capital for example, shareholders can anticipate
a down turn and may decide to offload their shares to limit losses when share price drops.
Seasoned investors like Warren Buffet advocate calculating the intrinsic value of a company
from the financial statements as the best method to evaluate true share price.
4. Creditors
Banks and suppliers constitute the main types of creditors a business will rely on to meet
operational requirements. Naturally these lenders of monies and goods are concerned with a
company’s solvency, that is its creditworthiness to ensure that the company can trusted to repay
its debts obligations.
Such lenders heavily use ratios such as the current ratio and quick ratio, which use information
from the balance sheet, to gauge the company’s near-term assets and the readiness to use these
assets to cover its current liabilities. The cash flow statement is such a critical statement for the
lenders because it shows availability of cash and the ability of the business to generate such cash,
something net profit (from the income statement) will not show due to pending cash receipts
from trade receivables.
5. Employees
Employees use financial statements to understand the financial health of their employer, which
can affect job security, wage negotiations, and benefits. Employees with the help of their
accountants can learn about the financial health of a company by using metrics such as the
current ratio to be informed on liquidity concerns and anticipate whether a cash crunch is coming
which may affect the firm’s ability to meet payroll obligations.
The income statements’ net profit and the balance sheet’s dividend payouts can help the
employee understand the company’s worth and assist them in negotiating wages and benefits.
Employees can then take the choice of stock options (if available) in place of cash as part of
remuneration if anticipate the company will perform well in the long run.
Conclusion
Investors, creditors, management, regulatory authorities, and employees all rely on these
documents to make informed decisions. The information provided by financial statements not
only helps stakeholders assess the financial health and performance of a company but also
ensures that the company operates in a transparent and accountable manner.