Does Everyone Look at Your Financials the Same Way?
Mar 14, 2022
Does everyone look at your financials the same way?
Short answer? No, they don't.
There are a bunch of people that could be looking at your financial statements at some point in your business journey - we'll call these "audiences".
Each audience is going to have a different set of needs and wants when reviewing your financials.
For clarity, I'm focusing on privately held companies today. Motivations for people looking at public companies are similar, but the risks associated with access to financial information are very different.
Investors
This is YOU. Maybe you have a partner or two.
You want to make sure that the company is profitable enough that it makes sense to keep it open, right?
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You can pay yourself a decent income (Yep! You read that right! Pay yourself. You shouldn't be working for free!)
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You can pay your employees and vendors without hurting
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Your customers are paying on time
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You're seeing improvements over time (new customers, increased sales, maintaining or increasing profit margins, controlling operating costs)
Management
In the beginning, Management may be just you and your partners if you have any. As your company grows, you will need to hire people you can trust who are experts in their fields to manage areas of your company for you (production, finance, sales, etc.).
Management's goal is to make sure the company is meeting its goals.
Management uses the financial statements in a similar manner to the owners, but at a more detailed level. Management is driving the decisions that lead to the financial results. If something isn't working out as expected, changes need to be made to improve results.
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Is there enough cash to cover short term and long term debts?
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Is the company hitting expected profit margins?
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Does the company need more financing? If so, when?
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Are inventory and operating costs being managed effectively?
Customers
Why do customers care about your financials?
Customers are concerned about their supply chain. You are a part of that. If your company is struggling to meet targets, it impacts their business. If your industry typically extends credit to its customers, then this will also be a key factor. If you are having cash flow problems, extending credit to your customers could make it worse, so you might limit credit or eliminate it all together. This isn't in the customer's best interest, so they could go somewhere else.
Competitors
Your competitors want to stay relevant in the market. To do that, they need to keep an eye out on what other companies are doing and how they are performing. You should be doing the same thing to them!
Competitors shouldn't have direct access to your financials, but they can make assumptions based on things they hear from other competitors, suppliers, and media sources. It's critical to keep access to your financials as limited as you can to protect your company's competitive advantage in the market.
Governmental agencies
From a financial standpoint, government agencies are primarily concerned that you are paying the appropriate amount of taxes and fees.
Common expenses include:
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Sales tax
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State income tax
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Federal income tax
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Property taxes
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Unemployment
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Social security and Medicare taxes
They may require supplemental information to your financial statements to verify compliance. (ex: payroll reports, detailed sales data)
Employees
Employees are also interested in the financial performance of the company. They are concerned with many subjects including:
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bonuses and commissions tied to company profits
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potential for salary increases and promotion opportunities
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if the company is stable and won't have to lay off anyone
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could be involved in decision making and need access to specific information to assist in the process
Lenders
When you are applying for a loan, your lender wants to feel reasonably confident that you will be able to pay them back. They'll be interested in your current debt, cash flow, sales forecast and budget so they can make an informed decision on whether it makes sense to loan you money or not.
You may be required to submit periodic updates on your financials to your lenders to continue to qualify for the loan (ex: bank line of credit).
Suppliers
Your suppliers are worried about your ability to pay them for their products and services. If you are asking them to extend payment terms, they could ask for copies of your financial statements so they can evaluate your creditworthiness. Once a credit line is established, suppliers may require periodic updates on your financials to re-qualify you or extend further credit.
As you can see, needs and wants are different for each audience.
There are underlying themes of course:
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Are you stable?
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Can you pay your bills?
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Does the future look good?
Keep these in mind as you are creating processes in your business.
Do your processes support your business need to have clear, consistent and timely financials? If not, you need to make changes so that they do. It's all connected!