Impact of Financial Statements


by M Nawaz

Each business is required to maintain a set of financial statements for its operations. The benefits may not seem to be many from an individual perspective; from the standpoint of a potential investor, such statements may deliver what may be called an opportunity to enhance funding.

Some believe that accounting, also called bookkeeping, is non-essential and tend to concentrate on generating sales and getting the best bargain from suppliers. Making journal entries and maintaining ledgers and books of accounts are not the only functions of an accountant or bookkeeper. It includes proper management of all relevant documents, such as invoices, purchases and sales orders, agreements, and tax returns etc, which assist in developing an impressive set of financial statements.

Users of financial statements

Investors

Investors fall into two categories, existing and potential. Some seek a takeover, leading to majority control and shareholding. This usually occurs when a company is losing public confidence resulting in low market value. Often considered as hostile takeovers, the investors tend to restructure the business and control it completely, issue shares or sell it off in the open market.

The other category consists of short and long-term investors, both interested in increasing their wealth with the minimal effort. This may be through either earning dividends or trading shares in the Stock Exchange.

Lenders

These may supply funds to the organization on short and/or long-term basis. There are several financial institutions and individuals willing to lend to progressive companies but few to support those with lower earning levels. The loan carries a charge of interest payable annually or as agreed, on the principle or compounded principle, over the period that the loan has been issued.

The financial institutions mentioned above includes banks, discount houses and factors. Banks usually provide overdraft and other flexible fund management facilities to companies, provided they have a strong financial performance backing. Discount houses provide invoice discounting facilities but require a proper debtor management system running in the company that ensures that debtors are not let loose or have a habit of defaulting. Factoring companies help in recovering the amount due by debtors but ask for a service charge, which varies with each situation and company status.

Suppliers

Suppliers of products and services to the company would like their investments - sales made on credit terms - received with surety. A creditor would be reluctant to trade any further if s/he is not guaranteed a timely payment against the issued invoice.

Employees

Many would consider employees the least affected of all when it comes to analyzing the company's accounts. Think again. The employees will be first to feel the change in circumstances as they may be promoted, demoted or fired. They would be very much interested in finding out if the company exhibits any points in their favor, mainly job security and facilities.

Government bodies

As a rule, Companies House requires each company, private or public, to submit their financial statements and accounts annually. The list of registered companies and their most recent accounts are published in the Companies House official publication, which informs the public of their performance for the year or period ended. In addition, the government has the responsibility to ensure that the information is not delusive and the rights of the public are protected. Furthermore, it bears the responsibility of prosecuting any offender of the law, including corporate and consumer law. For example, a director of a plc can be prosecuted for a criminal offence if the accounts have not been delivered to the Companies House.

Competitors

It may seem odd, but existing competitors and new entrants have to consider the likelihood of their success or failure in trying to conquer the market. Their primary interest lies in the business ratios of efficiency/productivity and cash, debtor and credit management. For the industry, it acts as a comparative for better performance of firms and companies of varying sizes. They also help in establishing a trend of the industry that is normally a guide to new entrants to study, analyze and perform.



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