Each stakeholder group will want to know different information about a business, therefore will analyze Final Accounts differently.
Who is interested in the performance of a business?
It is usual to divide the users of accounting information into internal users and external users of accounting information. The same as we divide stakeholders into Internal Stakeholders and External Stakeholders.
Directors, managers and shareholders of a business, who are internal users, will have access to much more detailed and up-to-date data than other groups.
Banks, governments, employees, customers and potential shareholders, who are external users, may want to know more general things such as whether or not the business will have profits to reinvest in the future, whether profits are going to rise or fall next year, will the business be able to pay its short-term debts, will the firm be able to repay long-term borrowing, etc.
What each stakeholder wants to know about the performance of a business?
Here are the main uses of Profit and Loss Account (P&L Account) and Balance Sheet by different business stakeholder groups.
Business owners (shareholders)
The objective of business owners (current shareholders) is to see market value of their shares increase so they can earn capital gain. The second objective to receive regular dividends.
1. Capital gain. They want to know how well the business is performing and whether they are getting a good return on their investment. They will compare the profits of the business with previous years and with similar businesses. High profits will usually increase the market value of shares. Shareholders might then sell their shares at a higher price than they paid for them in the past.
Business owners (current shareholders) want to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– What is the current value of the business?
– What is the current value of their investment in the business?
– Does the business have potential for growth in the next couple of years?
– What will be the average annual growth rate in the next five years?
– Should they decide to buy more shares in the business?
– Should they decide to sell some shares of their holding?
2. Dividends. The level of dividends paid to shareholders is usually linked to the level of profit, e.g. high profits potentially equal to high dividends. Shareholders will compare the dividends they receive with previous years. And, with the returns they could have got if their money was invested elsewhere.
Business owners (current shareholders) want to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– Is the business profitable?
– Is the business more profitable or less profitable comparing with other businesses in the same industry?
– Has the business become more profitable or less profitable in the last couple of years?
– What share of the profits are investors receiving as a dividend?
– Is the business increasing dividends every year?
The objective of potential investors (future shareholders) is to find out the profits of the business before investing their money. Prior to buying shares, they will want to know what returns from their investments they can expect to receive.
Managers
The objective of managers who are running the business is to achieve financial objectives set by the directors of the business at the beginning of each year.
Managers want to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– Did the company achieve its sales revenue targets?
– Did the company achieve higher or lower sales revenue comparing with previous years?
– Did the company achieve higher or lower sales revenue comparing with competitors in the same industry?
– How well were the costs of production (Variable Costs) controlled?
– How well were the expenses (Fixed Costs) controlled?
– Did the company achieve its profit targets?
– Is the business going to cut costs by lowering salaries for managers or delayering?
– Are the profits rising or falling comparing with the previous year?
– How much Retained Profit can the business keep to finance its future projects?
– Should the business open more branches or close some of them?
– Should the business launch new products or discard some of them?
– How well did each business department and each division of the business perform?
– How should the business set targets for the next year, and what criteria should be used to review performance?
Employees
The objective of employees who are working for the business is to earn higher wages as well as to continue stable and safe employment when the company is making good levels of profit.
Employees want to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– Are our jobs secure?
– Is the business stable enough to continue paying us wages?
– What is the average wage in our business comparing with average wages in similar businesses in the same industry?
– Is the business likely to expand to create more opportunities for development, or be reduced in size so opportunities will be limited?
– Are profits rising so a wage increase can be afforded?
– Are profits declining so a wage decrease should be expected?
Suppliers (and other creditors)
The objective of suppliers who are selling suppliers to the business is to get information about its liquidity. Suppliers want know if the business has sufficient cash to pay its debts when they become due. It is because businesses often buy goods and services on a credit basis (using trade credit). Suppliers will also be interested in the profitability of a business. A business which is making good profits and expanding will continue to need more and more raw materials and other supplies. This will help suppliers to increase their own sales revenue and grow.
Suppliers want to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– Does the business have good credit ratings for past transactions?
– Is the business liquid enough to pay off its debts for the supplies already delivered?
– How long on average does it take this business to pay its invoices?
– Will the business continue buying more supplies in the future?
– What kind of supplies is the business going to purchase in the future?
– If the business did not pay its short-term debts, should we press for repayment of outstanding debts, or give the business some more time?
Lenders (banks, microfinance providers, etc.)
The objective of banks and other lenders is to receive the timely interest repayments on any money they have loaned the business. They also want to make sure that the business will be able to repay all its borrowing in full when it becomes due.
Lenders (banks, microfinance providers, etc.) want to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– What is the current profitability of the business?
– What is the current liquidity of the business?
– What is the current gearing of the business?
– Should we lend any money to the business?
– Should we lend more money to the business?
– Have the business repaid all of the previous loans?
– Was the business ever late with paying its debts?
– Should we allow an increase in overdraft facilities?
– Should we continue or discontinue an overdraft facility?
Government
The objective of the government is to receive an appropriate amount of TAX on Net Profit Before TAX of the business. In general, the higher the profits, the higher the TAX revenue will be received by the government. The lower the profits, the lower the TAX revenue will be received by the government. Secondly, profitable businesses will continue growing and expanding, hence create employment for the local citizens.
This will reduce government spending on supporting the unemployed.
Government wants to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– How much TAX is due from the business?
– Is the business staying within the law in terms of accounting regulations?
– Is the business violating any accounting regulations?
– Is the business going to pay more TAXes in the future to support the country’s economy?
– Is the business going to expand creating more jobs?
– Is the business in danger of closing down causing economic problems?
Customers
The objective of costumers is to find out whether the business will continue its operations in the short-term and long-term future. It is because customers want to make sure that a business will continue to supply them with goods and services which can meet their needs and wants.
Customers want to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– Is the business stable and secure?
– Will the business continue future supplies of the goods and services which we are purchasing?
– Is the business going to retain some of its Net Profit After Interest and TAX to invest in new technology which can improve the quality of products and lower the prices?
Local community
The objective of the local community is to see if the business is profitable and likely to expand, which could be good for the local economy – expanding businesses create new employment. Also, the local community wants to determine whether the business is making losses as this could lead to closure and lay-offs.
Local community wants to analyze Final Accounts of a business using Ratio Analysis, to find out answers to the following questions:
– Is the business making a profit?
– Will the business expand in the foreseeable future creating new jobs?
– Is the business making a profit?
– Will the business shut down in the foreseeable future causing lay-offs of employees?
In summary, although both groups (internal users and external users) are interested in Final Accounts of a business, each group will focus on different type of information as explained above.
Also, even though Final Accounts provide the most comprehensive financial information about the whole business, not all the information which the stakeholders want will be in Final Accounts, e.g. corporate culture or workforce motivation levels.
