Users of accounting information

Lender (bank): the business's liquidity — whether it can repay the loan and pay interest.

Shareholder: the business's profitability (and dividends) — the return on their investment.

(a) Employee — internal. Interested in the business's profitability and stability, which affect job security and pay.

(b) Supplier — external. Interested in the business's liquidity and payment record — whether it will pay what it is owed on time.

A bank needs to decide whether the business can repay the loan and pay the interest as it falls due, so it analyses the financial statements to assess risk:

• Liquidity (current and acid test ratios): can the business meet its short-term obligations?
• Gearing: how much the business already owes, and whether more debt would make it over-borrowed.
• Profitability and cash generation: can it generate enough profit/cash to service the loan?
• Security: what assets could back the loan if the business defaulted.

If these indicate the business is profitable, reasonably liquid, not over-geared and has security, the bank is more likely to lend; weak figures increase the risk and may lead it to refuse or charge a higher rate.

Managers must plan, control and make decisions about running the business day to day. For this they need detailed information — for example individual product or department costs, budgets, and cost-variance reports — rather than the summarised totals in the published statements.

They also need it frequently and up to date (e.g. monthly or weekly), because decisions cannot wait for an annual report. The published statements are a once-a-year summary aimed at external users, so they lack the detail and timeliness managers need for control and decision-making.

Different stakeholders have competing claims on the same profit and resources:

• Shareholders vs employees. Shareholders want higher dividends, while employees want higher wages and bonuses. Both come out of the same profit, so more for one means less for the other.

• Lenders vs owners. Lenders prefer caution, low gearing and strong liquidity so the company can repay them safely; owners may prefer to reinvest or take risks to grow profits, which can increase gearing and risk.

• Government/public bodies vs the company. The government and public bodies may want more tax and disclosure and lower environmental impact, while the company may want to minimise tax and costs to protect profit for owners.

Conclusion. Because these groups draw on the same profit and resources but with different priorities, their interests frequently conflict, and the directors must balance them when making decisions.

(a) Supplier → liquidity ratios (current ratio, acid test). A supplier's concern is whether it will be paid on time, so it focuses on whether the business can meet its short-term obligations.

(b) Potential shareholder → profitability ratios (gross profit margin, profit margin, ROCE), and investment ratios. A shareholder is deciding whether to invest for a return, so it focuses on how profitable the business is and the return on capital.

(c) Long-term lender → gearing and liquidity (plus interest cover and profitability). A lender's concern is whether the business can service and repay debt over the long term, so it focuses on how much it already owes (gearing), whether profits cover the interest, and its ability to meet payments.

Each user selects the ratios that answer their specific decision — payment, return or repayment.

The published financial statements are useful — they provide objective, audited information about the business's performance and position that helps users assess profitability, liquidity and gearing.

However, relying on them entirely is unwise because they have limitations:

• they are historic (about the past, not future prospects);
• they exclude items not measurable in money (e.g. staff skills, brand strength, market position);
• they are affected by estimates and accounting policies (e.g. depreciation method, inventory valuation), so figures are not exact and may not be fully comparable;
• they show the business at one date only, which may not be typical.

Conclusion. The statements are a valuable but incomplete source. A user should also consider other information — market conditions, competition, management quality and future plans — so the statement is not wholly correct: the accounts should inform, but not solely determine, the decision.

Employees are interested in the business's profitability and financial stability because these directly affect them:

• a profitable, stable business is more likely to offer secure jobs and to be able to afford pay rises and bonuses;
• a business in financial difficulty may need to cut jobs or wages, threatening their security and prospects.

So employees use the statements to judge how secure their employment and pay are likely to be, and whether the business can afford improvements in their terms.

A stakeholder is any party with an interest in the business and its performance. Example: a lender, shareholder, employee, supplier, customer or the government.

Identify the investors' decision. Potential investors are deciding whether to invest for a return, so they care about profitability, growth and risk.

Select relevant information.

• Profitability ratios (gross profit margin, profit margin, return on capital employed) to show how well the company uses its resources to generate profit.
• Trends over several years to show growth and consistency, not just one year.
• Risk indicators such as gearing and liquidity, so investors can judge how safe the investment is.
• Investment-related measures (e.g. earnings and dividends) showing the likely return.

Present it clearly. Use clear statements, well-labelled ratios and a brief commentary explaining the trends, so investors can assess the return and risk quickly and confidently.

By focusing on profitability, growth and risk, and presenting them clearly with trends, the company gives investors exactly the information their decision requires.