Users of Accounts (Cambridge (CIE) IGCSE Business): Revision Note

Internal users of accounts

• The financial accounts of a limited liability business need to be submitted to Companies House each year

  • Public Limited Companies need to have their accounts audited before they publish them

• A range of internal stakeholders use business accounts for different purposes

Business owners

• Sole traders and partners use financial accounts for several reasons

  • To check if the business is making enough profit

  • To see if the business can pay short-term debts

  • To plan for growth or reduce costs

• Shareholders also use accounts to discover

  • How profitable the company is, compared to the investment they have made

  • To decide whether to sell or keep their shares

  • To assess whether the company is in a position to pay dividends

Managers

• Financial accounts and ratio analysis are crucial to help managers:

  • Measure business performance and set future targets

  • Make decisions, such as whether to cut costs or invest in new products

  • Identify problems early (e.g. falling liquidity or high debts)

  • Compare with competitors or past performance

Employees

• Employees are also interested in the information within financial reports to

  • Judge the business’s financial health to check that they have job security

  • See if the business is profitable or liquid enough to award pay rises or bonuses

External users of accounts

Suppliers

• Suppliers can use financial accounts to determine if the business can pay its bills on time

  • They consider the current ratio to see if a customer has enough cash or short-term assets to cover what they owe

• If the business is struggling, suppliers may

  • Ask for payment in advance

  • Refuse to give trade credit

Government

• Governments will use accounts and ratio analysis to check that

  • The business is paying the correct amount of tax

  • The business is following laws such as those for financial reporting

• They will also, on a broader level, monitor business size and performance for economic planning, such as the ability to create new jobs

Lenders and banks

• Lenders, including banks, often look very closely at financial accounts to determine

  • Whether to approve a loan

  • Whether the business can repay a loan

• They use liquidity ratios, like the current ratio, and profitability ratios, like RoCE, in their decision-making

  • A business with weak liquidity or falling profits may be seen as risky and would likely be refused lending

Using financial accounts to make decisions

• Financial accounts and ratio analysis can be used to support strategic decisions

  • Investment or divestment decisions

  • Determining the most profitable option given the level of capital employed

• Using these tools gives a clear, factual picture of the business’s performance and financial health

  • Financial accounts show real profit, sales and costs data

  • Ratios turn these numbers into useful tools for comparing and spotting problems or strengths

  • They make it easier to compare performance from year to year or with other businesses of a similar size

Limitations of using accounts and ratio analysis

• While financial accounts and ratios are useful in decision-making, they are not perfect for several reasons

They use past data

• Financial accounts show what has already happened

• Ratios are based on past performance, not future results

• Conditions can quickly change (e.g. new competitors, economic shocks), so past data may not help predict what will happen next

They do not show the full picture

• Accounts do not explain why figures changed

• Ratios cannot measure non-financial factors such as

  • Employee motivation

  • Customer satisfaction

  • Product quality

• Important business problems may be missed if only financial data is used.

Data can be manipulated

• Businesses might make their accounts look better than they really are by delaying payments or hiding debts

• Decisions based on false or adjusted data can lead to poor outcomes