Why Internal Users of Financial Information are Crucial for Business Success
Business success depends on many factors, such as leadership, strategy, marketing, and financial management. When it comes to the latter, it’s easy to assume that financial information is relevant only to external stakeholders, such as investors, lenders, regulators, and analysts. However, this assumption is wrong. In reality, internal users of financial information play a crucial role in business success. In this article, we will explore why internal users are important, who they are, and what types of financial information they need.
The Importance of Internal Users
Internal users are individuals or groups within a company who use financial information for decision-making, planning, controlling, and evaluating purposes. They include executives, managers, supervisors, employees, and committees. Why are they important? First, they are the ones who make things happen in a company. They are responsible for setting goals, making plans, allocating resources, and monitoring performance. Without them, a company would be directionless and inefficient.
Second, they have different information needs than external users. External users focus on the company’s financial position, performance, and prospects from an investment or credit perspective. They rely on financial statements, ratios, and forecasts to assess the risk-return tradeoff of their decisions. Internal users, on the other hand, need more detailed, timely, and relevant information that can help them make better decisions, solve problems, and achieve goals. They also need to communicate this information to others in a clear, concise, and persuasive way.
Finally, they can contribute to the improvement of financial management practices. Internal users are closer to the operational and strategic aspects of the company than external users. They have more insights into the strengths, weaknesses, opportunities, and threats of the company. They can provide feedback, suggestions, and criticisms that can help financial managers diagnose problems, identify solutions, and implement changes.
Who are the Internal Users?
Internal users can be categorized into four groups: top management, functional managers, operational managers, and employees. Each group has different roles, responsibilities, and information needs.
Top management includes the CEO, CFO, COO, and other executives who are responsible for setting the overall direction and strategy of the company. They need financial information to assess the profitability, liquidity, solvency, efficiency, and effectiveness of the company as a whole. They also need financial information to communicate with external stakeholders, such as shareholders, analysts, and regulators.
Functional managers include those who are responsible for specific functions, such as marketing, production, human resources, and information technology. They need financial information to plan, budget, and control their activities. They also need financial information to evaluate the performance of their functions and the impact of their decisions on the company’s financial results.
Operational managers include those who are responsible for specific operations, such as sales, purchasing, logistics, and customer service. They need financial information to monitor the costs, revenues, profits, and cash flows of their operations. They also need financial information to identify opportunities for improvement and to make decisions that can increase profitability and customer satisfaction.
Employees include all those who work for the company and have a role in achieving its financial objectives. They need financial information to understand the financial implications of their work, to participate in cost-saving and revenue-generating initiatives, and to share ideas and feedback that can help improve financial performance.
What Types of Financial Information do Internal Users Need?
Internal users need various types of financial information, depending on their roles, responsibilities, and activities. Some examples are:
– Financial statements, such as income statements, balance sheets, and cash flow statements, that provide an overview of the company’s financial performance and position over a period of time.
– Budgets, forecasts, and plans that set targets for revenues, expenses, profits, and cash flows and that guide resource allocation and decision-making.
– Cost reports, variance analyses, and activity-based costing reports that show the costs and profitability of products, services, processes, and projects.
– Key performance indicators (KPIs) that measure the effectiveness and efficiency of operations, such as customer satisfaction, employee productivity, supplier reliability, and inventory turnover.
– Risk assessments, contingency plans, and scenario analyses that evaluate the potential impact of internal and external factors on the company’s financial stability and growth.
– Benchmarking analyses, industry comparisons, and best practices reports that provide insights into how the company performs relative to its competitors and peers and how it can improve its financial performance.
Conclusion
Internal users of financial information are crucial for business success. They are the ones who make things happen, who need more detailed, timely, and relevant information, and who can contribute to the improvement of financial management practices. They include top management, functional managers, operational managers, and employees, each with different roles, responsibilities, and information needs. They need various types of financial information, such as financial statements, budgets, cost reports, KPIs, risk assessments, and benchmarking analyses. By providing them with the right information, financial managers can empower internal users to make better decisions, solve problems, and achieve goals.
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