Purpose of accounts to stakeholders
The Purpose of Accounts to Stakeholders
A business's financial accounts are formal records of its financial performance and position over a given period. They are not produced solely for internal management use: a wide range of stakeholders — individuals and groups with an interest in the business — rely on financial accounts to make decisions. Understanding who uses accounts, and why, is essential to appreciating both their importance and their limitations.
Investors and shareholders
Existing and potential investors and shareholders are among the most attentive users of financial accounts. They scrutinise the profit and loss account to assess profitability trends and the likelihood of dividend payments. They examine the balance sheet to evaluate the financial strength and stability of the business — particularly the level of debt relative to equity. Shareholders use accounts to decide whether to buy more shares, hold their existing stake, or sell. Potential investors use accounts to assess whether the business represents a sound investment opportunity.
Managers
Managers use financial accounts for internal decision-making. Comparing actual financial performance against budgets reveals variances that require investigation. Trend analysis across multiple years identifies whether the business is improving or deteriorating. Managers also use accounts to justify investment decisions, support loan applications, and set targets for future periods. Unlike external stakeholders, managers typically have access to more detailed management accounts — internal reports not required to be published — in addition to the statutory financial statements.
Employees and trade unions
Employees use financial accounts to assess the security of their employment and the financial capacity of the business to fund wage increases or improved working conditions. Strong profitability may support a pay claim; heavy losses may signal the risk of redundancy. Trade unions use published accounts during pay negotiations to establish what the business can realistically afford, and to challenge management claims of financial hardship.
Creditors, lenders, and suppliers
Banks and other lenders examine accounts before approving loans to assess the creditworthiness of the business — particularly its ability to service debt from operating profits and its existing level of borrowing. Suppliers offering trade credit use accounts to determine whether the business is likely to pay its debts on time. A business with weak liquidity or mounting losses may find that lenders refuse further credit or that suppliers demand payment upfront rather than extending credit terms.
Government and tax authorities
The government and tax authorities (such as HMRC in the UK) use financial accounts to calculate the tax liability of the business. Corporation tax is levied on taxable profit, which is derived from the profit and loss account. Governments also use published accounts to monitor the economic health of businesses and sectors, and to identify where regulatory intervention may be needed.
Customers
Customers, particularly those entering long-term contracts or relying on a single supplier for critical components, may examine accounts to assess whether the business is financially stable enough to fulfil its obligations. A customer that places a large advance order with a business that subsequently enters insolvency may lose both its order and its payment. Financial stability is therefore a factor in purchasing decisions, especially in business-to-business markets.
| Stakeholder | Primary interest in accounts | Key questions asked |
|---|---|---|
| Investors / shareholders | Profitability; return on investment; dividend prospects | Is the business profitable? Are dividends likely? Is the share value secure? |
| Managers | Performance vs budget; cost control; investment planning | Are we meeting targets? Where are costs rising? What can we afford to invest? |
| Employees / trade unions | Job security; capacity for pay rises | Is the business financially healthy? Can it afford a wage increase? |
| Banks / lenders | Creditworthiness; debt repayment ability; liquidity | Can the business repay a loan? What is its existing debt burden? |
| Suppliers | Ability to pay debts on time | Will this business pay us within agreed credit terms? |
| Government / HMRC | Taxable profit; regulatory compliance | How much corporation tax is owed? Is the business trading lawfully? |
| Customers | Financial stability; long-term viability | Will this supplier still be trading in twelve months? |
Haverstock Engineering plc, a manufacturer of precision components for the aerospace industry, publishes its annual accounts. Seven different stakeholder groups examine the same document for very different reasons: the pension fund that holds 12% of the shares checks profit margins and dividend cover; the company's bank reviews the gearing ratio before renewing a £4 million revolving credit facility; a major airline customer assesses whether Haverstock is financially robust enough to fulfil a five-year supply contract; HMRC uses the pre-tax profit figure to calculate the corporation tax bill; and shop-floor workers' representatives study the accounts ahead of annual wage negotiations. One set of accounts, seven distinct purposes.
Key Takeaways
- Financial accounts serve multiple stakeholder groups, each with a different primary interest and a different set of questions they seek to answer.
- Investors focus on profitability and return; lenders focus on creditworthiness and liquidity; employees focus on job security and pay capacity; government focuses on tax liability.
- The same set of accounts is interpreted differently depending on the stakeholder's relationship with the business and their financial interest in it.
- Customers in long-term or high-value supply relationships also use accounts — financial stability is a factor in procurement decisions, especially in business-to-business markets.
- Understanding who uses accounts and why helps explain why businesses must publish accurate, transparent financial information — and why distorting those accounts is harmful to multiple parties simultaneously.