Interested Parties

A business does not exist in isolation — it has relationships with many different parties, each of whom has a financial interest in the business and uses accounting information to make decisions or fulfil obligations.

The key insight is that different parties have different decisions to make:

• Should I invest more money in this business? → Owners and prospective investors
• Will this business repay the loan? → Banks and lenders
• Will this business pay my invoice on time? → Suppliers
• Is my job secure? → Employees
• How much tax should this business pay? → Government

Because the decisions differ, the relevant information differs too. A bank cares most about liquidity — can the business meet its debt obligations? It is less concerned about whether the GPM has improved from 32% to 35%, because the bank's interest is secured as long as debts are repaid. An owner, conversely, wants ROCE to be high because they want a good return on the capital they have invested.

Cambridge 0452 exam questions on this topic will typically ask you to:

1. Name a user group
2. State what information/ratio they would focus on
3. Explain why — what decision does that information support?

The third step — the 'why' — is where most marks are awarded.

Owners and existing shareholders have invested their own capital in the business and want to know whether that investment is generating a satisfactory return.

Key ratios and why:

• ROCE: the primary measure — shows how much profit is generated per $100 of capital invested. If ROCE is below the interest rate available on savings accounts, the owner would be better off withdrawing their investment and putting it in a bank.
• Gross profit margin and profit margin: show whether the business is trading efficiently and controlling expenses.
• Current ratio: to ensure the business is financially stable and not at risk of insolvency.

Owners also want to know:

• Whether profit is sufficient to justify continued investment
• Whether dividends (or drawings) can be sustainably increased
• Long-term growth prospects

Prospective investors (people considering buying into the business or purchasing shares in a company) will examine the same profitability ratios plus:

• Trends over time (is the business improving?)
• Comparisons with alternative investments
• Risk indicators: high gearing, low liquidity ratios signal risk

Managers are responsible for running the business day-to-day and making decisions that will improve performance. Unlike external stakeholders who only see published annual accounts, managers have access to detailed internal management accounts — monthly or weekly breakdowns.

Managers are interested in all ratios as tools to:

• Identify underperforming areas (falling GPM → purchasing problem; rising receivables days → credit control issue)
• Set targets and budgets
• Compare actual results against planned performance
• Make strategic decisions: should we expand? Take on more debt? Change our product mix?

Specific managerial uses:

• Inventory turnover: is inventory being managed efficiently? Are there slow-moving lines to discontinue?
• Trade receivables days: is the credit control team collecting debts promptly?
• Trade payables days: are we paying suppliers on time? Are we taking advantage of early payment discounts?
• ROCE: are new capital investments generating adequate returns?

Managers also use ratios to communicate performance to owners and boards of directors and to demonstrate that the business is being run effectively (stewardship).

Banks and other lenders are interested in whether the business can repay the loan principal and meet interest payments.

Key ratios for lenders:

• Current ratio and liquid ratio: can the business meet its short-term obligations? A bank will not lend to a business with a current ratio below 1:1 without additional security.
• ROCE and profit margin: is the business profitable enough to generate cash to repay the loan over time?
• Gearing (ratio of borrowed capital to total capital): how much existing debt does the business already carry? High existing gearing signals higher risk that new debt may not be repaid.

Banks also want to see consistent, improving trends rather than volatile ratios, as stability reduces lending risk.

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Trade creditors (suppliers) have extended credit to the business (they have supplied goods but not yet been paid). They want to know:

• Can the business pay its bills? → Current ratio and liquid ratio
• How long does the business typically take to pay? → Trade payables payment period
• Is the business profitable and growing? → A profitable business is less likely to default on payment

A supplier discovering that a customer's liquid ratio has fallen to 0.4:1 might reduce the credit limit or demand upfront payment to protect itself from non-payment.

Employees and trade unions are interested in the financial health of the business because it affects:

• Job security: is the business profitable and financially stable enough to continue operating?
• Wage negotiations: if profitability is high and growing, employees may argue for higher wages. Trade unions use profit margin and ROCE data to support wage claims.
• Profit-sharing schemes: employees with profit-related pay need to know profit figures.

Key ratios: profit margin, GPM (is the business generating enough profit to sustain employment?), current ratio (immediate solvency risk).

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Government and tax authorities (e.g., HMRC, IRAS) are interested in:

• Net profit (from the income statement): to calculate income tax or corporation tax owed
• Employment levels: for policy and statistical purposes
• Compliance: is the business applying accounting standards correctly?

The government uses the profit figure as the basis for taxation — it does not primarily use ratios but does monitor profitability.

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Customers (especially large corporate buyers or those on long-term supply contracts) care about:

• Financial stability: will this supplier still be operating in six months to fulfil a long-term contract?
• Ability to continue supplying at consistent quality and price

Customers examine the current ratio and liquidity ratios to assess whether the business is at risk of insolvency, which would disrupt their supply chain.