Users of Accounts
Internal users of accounts
Internal users of accounts
The financial accounts of a limited liability business need to be submitted to Companies House each year
Public Limited Companies need to have their accounts audited before they publish them
A range of internal stakeholders use business accounts for different purposes
Business owners
Sole traders and partners use financial accounts for several reasons
To check if the business is making enough profit
To see if the business can pay short-term debts
To plan for growth or reduce costs
Shareholders also use accounts to discover
How profitable the company is, compared to the investment they have made
To decide whether to sell or keep their shares
To assess whether the company is in a position to pay dividends
Managers
Financial accounts and ratio analysis are crucial to help managers:
Measure business performance and set future targets
Make decisions, such as whether to cut costs or invest in new products
Identify problems early (e.g. falling liquidity or high debts)
Compare with competitors or past performance
Employees
Employees are also interested in the information within financial reports to
Judge the business’s financial health to check that they have job security
See if the business is profitable or liquid enough to award pay rises or bonuses
External users of accounts
External users of accounts
Suppliers
Suppliers can use financial accounts to determine if the business can pay its bills on time
They consider the current ratio to see if a customer has enough cash or short-term assets to cover what they owe
If the business is struggling, suppliers may
Ask for payment in advance
Refuse to give trade credit
Government
Governments will use accounts and ratio analysis to check that
The business is paying the correct amount of tax
The business is following laws such as those for financial reporting
They will also, on a broader level, monitor business size and performance for economic planning, such as the ability to create new jobs
Lenders and banks
Lenders, including banks, often look very closely at financial accounts to determine
Whether to approve a loan
Whether the business can repay a loan
They use liquidity ratios, like the current ratio, and profitability ratios, like RoCE, in their decision-making
A business with weak liquidity or falling profits may be seen as risky and would likely be refused lending
Using financial accounts to make decisions
Using financial accounts to make decisions
Financial accounts and ratio analysis can be used to support strategic decisions
Investment or divestment decisions
Determining the most profitable option given the level of capital employed
Using these tools gives a clear, factual picture of the business’s performance and financial health
Financial accounts show real profit, sales and costs data
Ratios turn these numbers into useful tools for comparing and spotting problems or strengths
They make it easier to compare performance from year to year or with other businesses of a similar size
Limitations of using accounts and ratio analysis
Limitations of using accounts and ratio analysis
While financial accounts and ratios are useful in decision-making, they are not perfect for several reasons
They use past data
Financial accounts show what has already happened
Ratios are based on past performance, not future results
Conditions can quickly change (e.g. new competitors, economic shocks), so past data may not help predict what will happen next
They do not show the full picture
Accounts do not explain why figures changed
Ratios cannot measure non-financial factors such as
Employee motivation
Customer satisfaction
Product quality
Important business problems may be missed if only financial data is used.
Data can be manipulated
Businesses might make their accounts look better than they really are by delaying payments or hiding debts
Decisions based on false or adjusted data can lead to poor outcomes