Stakeholders Rely on Final Accounts to Assess Business Performance, Financial Health, and Decision-Making Capacity
- If you were an investor considering buying shares in a company you'd want to know if the business is profitable, stable, and likely to grow, right?
- This is where final accounts come in.
Definition
Final Accounts
The set of financial statements prepared at the end of an accounting period, usually including the profit and loss account and the balance sheet.
- They include the statement of profit or loss and the statement of financial position.
- These documents are invaluable to a wide range of stakeholders, individuals or groups with an interest in the business.
Why Stakeholders Care About Final Accounts
- Different stakeholder groups use final accounts for different reasons.
- Some focus on profitability, while others prioritize financial security, ethical concerns, or regulatory compliance.
- The table below summarizes key stakeholder interests:
Internal Stakeholders: Directly Impacted by Financial Performance
1. Shareholders – Owners Who Expect Returns
- Shareholders, as business owners, are deeply invested in financial results. They focus on:
- Profitability: How much the company earns after expenses.
- Dividends: Their share of the profits.
- Company valuation: The worth of their investment over time.
- Retained profits: Whether the company reinvests or distributes earnings.
If Apple’s final accounts show high retained profits, shareholders might question whether dividends will increase or if funds will be reinvested in new product innovation.
Common Mistake- Many students confuse stakeholders and shareholders. Remember:
- Stakeholders = Anyone with an interest in the business.
- Shareholders = Business owners and one type of stakeholder.
Investors often compare a company's financial performance with industry benchmarks or past performance to make informed decisions.
2. Employees: Gauging Job Security and Growth Prospects
- Employees rely on final accounts to understand the company's stability and potential for growth.
- Key areas of interest include:
- Profitability: Higher profits may lead to bonuses, pay raises, or job security.
- Financial Stability: A strong balance sheet indicates the company can weather economic downturns.
Google’s high profitability allows it to provide stock options and performance-based bonuses to employees, boosting motivation.
3. Managers: Strategic Planning and Resource Allocation
- Managers use final accounts as a foundation for decision-making.
- They analyze financial data to:
- Identify Trends: Are revenues growing or declining?
- Control Costs: Are expenses rising faster than revenues?
- Plan Investments: How much capital is available for future projects?
Managers often use financial ratios (covered in Chapter 3.5) to gain deeper insights into performance and efficiency.
