Accounting provides financial data so individuals can analyze the financial health and stability of a business. While there are many users of accounting information there are also many reasons why this information would be needed. Some reasons can include measuring the financial performance of assets, liabilities, equity, income, expenses and cash flow all in order to have the information to make better financial decisions. Other reasons include making financial decisions for investment, credit and operational decisions.
There are several types of users who will use financial statements for managerial accounting, but they generally fit into either internal or external users. Each group will use this information for different purposes.
Who are internal users of accounting?
Internal users of accounting information (sometimes known as internal users), typically work within the company.
Some of the internal users of accounting include:
- Owners: Responsible for the long-term survival of the business so they will use reports to analyzing the profitability of their investment and use this information to make top-level decisions for the future like deciding which opportunities to pursue and eliminate.
- Management: Taking direction from the owners, management will use accounting information to execute top-level decisions, monitor and report results.
- Employees: Occasionally, employees will use accounting information to see how stable a company is for their job security. More often though, employees will be interested in a business’s financial information when it relates to their income as sometimes bonuses, commissions, profit sharing or other financial metrics are used as a financial incentive.
Some of the ways internal users employ accounting information include the following:
- Assessing the effectiveness of management’s operational decisions and use of the business’s resources
- Analyzing financial performance, cash position and the ability of the business to take on investment opportunities.
- Benchmarking against industry averages in terms of profitability, sales per employee, etc to ensure the business is competitive
Who are the external users of accounting?
External users of accounting information (sometimes called secondary users) include the following:
- Creditors: Use financial information to make decisions whether credit will be extended or restraints on spending will be put in place to pay down debts owed to the creditor. Before extending credit, banks typically require businesses to present financial statements to judge credit worthiness.
- State & Federal Tax Agencies: Use a business’s financial information to ensure the company is paying it’s fair share of taxes.
- Investors: Investors use accounting information to determine whether a company is a good investment. Investors providing start-up capital review financial documents to judge the safety of their investment and if the company is making sound financial decisions to maximize their investment.
- Customers: B2B customers may look to a company’s financial information to assess financial stability and payment history to ensure consistent shipment of product or timely payment.
There are many users of accounting documents and their uses vary depending on what information the reviewer needs to know.