Financial statements are useful not only to the owner. Many other parties are also interested because their decisions depend on the financial health of the business. These parties are known as stakeholders and can be divided into internal and external parties.
Internal parties
- Owners and shareholders — want to know whether their capital is producing a profit.
- Managers — use the statements to plan, control and make operational decisions.
- Employees — are interested in the stability of the business because it affects job security and wages.
External parties
- Banks and creditors — assess the business's ability to repay before granting credit.
- Potential investors — decide whether it is worth investing.
- The government and LHDN — calculate tax and check compliance with the law.
- Suppliers — judge whether it is safe to allow trade credit.
Example
Before approving a RM50,000 loan to Zaki's business, the bank officer studies its financial statements to see whether the business earns a steady profit and can afford the instalments.
Remember
Internal parties are inside the business (owners, managers, employees), while external parties are outside (banks, investors, government, suppliers). Each party looks for different information.
Why these interests differ
Each party reads the statements with its own purpose. Owners focus on profit, banks focus on the ability to repay, and employees focus on stability. Investors, meanwhile, compare the likely return with other investments, and suppliers weigh the risk of not being paid. Honest and accurate statements are therefore essential so that every party can trust them and make sound decisions.
These differing interests also explain why financial statements must follow the same standards. If every business prepared its statements in its own way, external parties such as banks and investors would find it hard to make fair comparisons. Uniform standards ensure the information can be trusted by all stakeholders.