External users

External users are those entities interested in the financial results of a business, but who take no part in operating the entity. Accounting standards are intended for this audience, so that organizations release financial statements that are consistently formulated across entire industries, making it easier for external users to rely upon the presented information. Examples of external users are:

  • Creditors. Creditors want to know if a company can pay its bills in a timely manner, and so will want to peruse the financial statements to determine the firm's liquidity. They have a particular interest in the current ratio of the organization. An outcome of this examination can be a change in the amount of credit extended to a business.

  • Customers. Customers are more likely to have an interest in a company's financial statements when they rely upon the goods and services provided by the firm. If the firm is in a weak financial position, customers are more likely to take their business elsewhere.

  • Investors. Investors want to examine the historical financial results of a business, while also delving into management's best estimates for the future prospects of the organization. These information needs come from a firm's financial statements, perusal of any forecasts released by the business, discussions with industry analysts, and so forth. An outcome of this review can be changes in the amount of a firm's shares held by outsiders, which can alter the stock price.

  • Labor unions. Labor union negotiators want to see a firm's financial statements in order to arrive at negotiating positions regarding the compensation and benefits of the employees that they represent.

  • Lenders. Lenders want to know if a business can pay for outstanding loans, and whether they have sufficient collateral to support the loans. Based on their review of a borrower's financial statements, they may call a loan or be willing to extend additional funds.

  • Regulators. Government agencies want to know the financial condition and profits of a regulated business, which can impact the prices they will allow a firm to charge to its customers.

  • Suppliers. Suppliers who are being asked by the firm to supply credit will likely want to delve into the company’s financial statements and historical payment patterns in order to arrive at a maximum amount of allowable credit.

Related Courses

The Interpretation of Financial Statements