Financial statements are often produced monthly and some, at the end of a tax year. They assist management in taking the “pulse” of the business. Understanding financial statements and drawing appropriate conclusion from the figures is essential for optimal business growth.
However, financial statements aren’t just for the benefit of the internal operations of a company. Many external entities require them as well. Preparing them properly and according to GAAP accounting principles is vital.
External Entities Who Use Financial Statements
This list is by no means exhaustive. It is meant to demonstrate the purpose financial statements serve beyond the scope of their internal function.
- Current Equity Investors & Lenders: Just like internal management, current investors and lenders use financial statements to monitor the value of their investment and to evaluate the company’s performance.
- Prospective Equity Investors & Lenders: Financial statements serve potential investors and lenders with the necessary information to decide whether or not to invest in the company.
- Investment Analysts, Money Managers & Stockbrokers: They use financial statements to help them make appropriate recommendations to their clients about buying, selling and holding onto the stock options offered by the company.
- Major Customers & Suppliers: Financial statements assist them in evaluating the financial strength of the company. The statements reflect the company’s stability or lack of as a dependable resource for their business.
- Labor Unions: In defense of the employees, labor unions monitor the company’s financial statements to see if a pay increase is merited.
- The Board of Directors: Financial statements provide a snap shot into the performance of the company’s management.
- Competitors & Potential Competitors: They use a company’s financial statements to compare with their own financials. Potential competitors use them to determine how profitable it may be to enter that particular industry.
- Government Agencies: Use them for taxing, regulating and investigating a company.