Chapter 32- Use of financial documents

Businesses produce financial documents as they provide useful information to help assess
business performance. Also, they help to make decisions.

Users of financial documents

Stakeholder group Reasons for interest

1. Managers  To assess the performance of the company, as it is a reflection of
their own performance
 To make comparisons with competitors to see how their
performance compares with that of rivals
2.Employees  They need financial information during wage negotiations
 To see whether their jobs are secure
3. Owners of small  To identify the financial performance and financial position of the
businesses business
 To decide whether it is worth continuing the business
4. Shareholders  To identify the financial performance and financial position of the
business
 To see the possibility of earning dividends
 To make comparisons with other companies that they may invest
 To see the growth of the business
5. Banks  In order to decide to lend to a company
 To check whether a business can repay the loan with interest
6. Suppliers  To assess the credit worthiness of the businesses that buy
resources from them on credit
 To identify the risk of new customers
7. Financial  To identify the financial performance and position of the firm
institutions before they invest funds in those companies
(Insurance
companies, pension
funds etc)
8.Government  To gather information about businesses so as to make them
available to the public
 To monitor the progress of the economy
 To evaluate the success of government’s economic policies
9. Competitors  To make comparisons with the business
 To help decide of a take over
10. The media  To produce reports on business and commerce
11. Tax authorities  To obtain details of income to decide the tax charge
12. Auditors  To check the accuracy of accounts
13. Registrar of  To ensure that company fulfills the condition of registration to
companies submit their final accounts each year
Why do businesses need financial documents?

 Funding decisions
Business can decide when more money is needed and for what reasons they are needed.

 Reducing costs
A business may use the financial documents to analyze cost and identify any problems.

 Increasing profitability
It is possible to use the financial documents to help find ways to making more profit.

 Investment decisions
Investment decisions are risky as it is uncertain whether the investment project will
generate returns in the future. However, financial documents help the managers to assess
whether a particular investment opportunity is worthwhile.