The use of accounting data to enable strategic decision-making

An annual report is a document published each year by a company (1) that brings together its audited financial statements and narrative reports to communicate performance to shareholders and other stakeholders (1).

The statement of financial position shows the firm's assets, liabilities and equity, so it reveals how much the business could borrow to fund a strategy. For example, a firm with low gearing and valuable assets has the capacity to take on a loan to finance expansion, whereas a highly geared firm may not. This matters because it tells managers whether a growth strategy is financeable before they commit to it.

The first group is shareholders and potential investors. They use the statement of profit or loss and the dividend information to judge the firm's profitability and the return on their investment, deciding whether to buy, hold or sell shares. A strong, growing profit and reliable dividends would encourage them to invest, so the report directly informs their decision.

The second group is lenders such as banks. They focus on the statement of financial position and cash-flow data to assess solvency — whether the firm can repay a loan. Low gearing and healthy liquidity reassure a lender, while high gearing signals risk. This helps the bank decide whether to lend and on what terms.

The same document therefore serves different audiences because each reads the part most relevant to its own decision.

Financial statements provide the quantitative evidence a business needs to make strategic choices about growth, investment and finance.

The statement of profit or loss shows revenue, costs and profit, so it reveals which products or markets are profitable and how much profit is available to reinvest. A firm planning to expand can use rising profits and improving margins as evidence that its existing model works and can fund growth from retained profit, rather than borrowing.

The statement of financial position shows assets, liabilities and equity, so it indicates the firm's capacity to finance a strategy. A business with a strong asset base and low gearing knows it can safely borrow to fund a new factory or acquisition; a highly geared firm may instead choose organic growth or raise equity. The strategy is shaped by what the balance sheet shows is affordable.

Cash-flow information then tests short-term affordability: even a profitable expansion can fail if the firm runs out of cash paying for premises and stock before sales arrive, so cash flow tells managers whether the timing of a strategy is feasible.

Used together, the three statements let a business judge whether a strategy is worthwhile (profit), financeable (balance sheet) and affordable (cash). However, because the accounts are historical and quantitative, they should be combined with market analysis and qualitative judgement rather than relied on alone.

Basing an expansion strategy on the financial statements has real strengths. The statements provide objective, audited evidence: the profit statement shows whether the firm is profitable enough to expand and reinvest, the balance sheet shows whether it can fund or borrow for growth, and cash flow shows whether the expansion is affordable in the short term. For a growing business, this discipline guards against over-ambitious plans the firm cannot pay for — many businesses fail not because their idea is poor but because they expand beyond their financial capacity. Using the accounts also forces managers to set measurable targets and to compare performance over time, which strengthens the quality of the strategic decision.

However, relying mainly on financial statements is risky. The accounts are historical: strong recent profits do not guarantee future demand, so the firm could expand just as the market turns. They are quantitative only, ignoring brand strength, customer loyalty, staff morale, innovation and management quality — all of which determine whether expansion succeeds. They say nothing about the external (PEST) environment: competitors, the economy, regulation and technology. Figures can also be shaped by accounting policies or window dressing, and the narrative sections are written by management and may be optimistic. A firm that trusts the numbers alone could pursue a financially 'affordable' strategy that fails in the market.

Judgement (criterion). How far the firm should rely on its financial statements depends on the nature of the expansion and how stable its market is. Where the market is stable and the decision is mainly about affordability and finance — for example funding extra capacity for proven demand — the financial statements are the most important evidence. Where the market is changing fast or the firm is entering something new, financial data is necessary but far from sufficient, and qualitative analysis (SWOT, PEST, market research) matters more. On balance, the business should use its financial statements as the essential quantitative foundation of its expansion plan, but combine them with qualitative and external analysis rather than relying on them alone — accounting data tells the firm whether it can expand, not whether it should.

Stakeholders need information to make decisions — to invest, lend, supply, work for or regulate a business. Published financial statements are often seen as the most useful source, but how far that is true depends on the stakeholder and what they need to decide.

The case that financial statements are the most useful source. They are objective and audited, so stakeholders can trust them more than management's claims; the auditor's 'true and fair view' opinion is a powerful safeguard. They are comprehensive and comparable: profitability, solvency and cash position can be tracked over time and compared with rivals, giving lenders, investors and managers a rigorous basis for decisions. They are also publicly available for a plc, so even stakeholders without inside access can use them. For decisions that turn on financial questions — can the firm repay a loan? is it worth investing in? can it pay its suppliers? — the financial statements are exactly the right evidence, and arguably the single most useful source.

The case that other information can matter more. First, the statements are historical and quantitative, so they say nothing about the future, the brand, staff morale, customer loyalty or innovation — factors many stakeholders care about. Second, different stakeholders need different things: employees may value job-security signals and management communication more than the precise accounts; customers may care about product quality and reliability; the community may rely on the CSR/sustainability report or independent media rather than the numbers. Third, the narrative sections are management's view and may be biased, and figures can be window-dressed. Fourth, much vital information — the state of the market, competitors, the economy — simply is not in the accounts at all. So for some stakeholders and some decisions, other sources are more useful.

Weighing it up (criterion). The usefulness of financial statements depends on who the stakeholder is and what decision they face. For finance-focused stakeholders making financial decisions — investors, lenders, suppliers — the financial statements are usually the most useful single source. For stakeholders concerned with non-financial matters — employees with job worries, customers judging quality, communities judging conduct — other information (CSR reports, news, direct experience) often matters more.

Judgement. Published financial statements are the most useful source for the financial decisions of investors, lenders and suppliers, because they are objective, audited and comparable. But they are not the most useful source in every case: they are historical and quantitative, they omit the external environment and qualitative factors, and other stakeholders have different needs. The most defensible conclusion is that financial statements are the most useful source when the decision is essentially financial and the stakeholder values reliability and comparability — which covers many key stakeholders — but they should be treated as one source among several, complemented by qualitative and external information.