Companies use their financial statements to inform their stakeholders including investors, vendors, and government agencies about their businesses’ financial positions and profits or losses. Accountants and bookkeepers are in charge of compiling financial statements and maintaining accounting records in the books. You may better serve your company by keeping common external users of financial statements in mind as you record business transactions and report on financial results. Different external users may find different types of information in financial statements more useful than others.
Investors are the most common external users of financial statements. Both credit and equity investors make and assess their investment decisions by using relevant financial information in a company’s financial statements, including the balance sheet and the income statement. These are the two basic sets of financial reports to give an account of a business’ positions of assets, liabilities, and equity at the end of an accounting period, as well as sales, expenses, and income for the accounting period. Lenders are likely to look into a company’s total existing debt level as stated in the balance sheet to determine if the business is overleveraged and how safe its credit claims may be. They also study the income statement in particular, the earnings before interest, tax, depreciation, and amortization to be sure that the business earns enough income to cover its interest payments. On the other hand, current and prospective shareholders tend to focus more on the equity portion of the balance sheet and see how earnings are retained for equity growth. The net income from the income statement corroborates with the amount of earnings available to shareholders for retention.
Vendors rely on financial information to sustain their business relationships. Since vendors sell mostly on credit, they want to know about their customers’ total outstanding accounts payable as reported in the balance sheet and evaluate each customer’s ability to pay its bills on time. A customer’s earnings may not be the biggest concern for a vendor if the customer has enough cash or other cash-convertible assets on hand to cover its current liabilities, such as accounts payable. Vendors likely don’t want to do business with companies that have inadequate current assets to back up the trade credit extended to them.
Government agencies, including regulatory bodies and taxing authority, also use financial statements to monitor the financial conditions of the companies they have jurisdictions over. For example, the government may require companies in certain industries to meet mandatory capital injections as measured against total risky business investments a company may undertake. In this case, financial statements are very useful in revealing such capital-to-assets risk ratios based on information from the asset and equity sections of the balance sheet. For tax purposes, companies should report accurately in their income statement about tax-deductible expenses and any losses they can use against future earnings to receive tax write-offs from taxing authority. Make certain that the information that investors, vendors, and government agencies look for in your company’s financial statements is available, correct, and appropriate for their consumption. This lets your business attract investors, promote vendor relationships, and comply fully with government rules and regulations.