External users are individuals or entities that have an interest in a company but are not involved in its day-to-day operations. They use the information provided by the company, particularly financial information, to make decisions related to the company. Key types of external users include:
- Investors and Potential Investors: These users need financial information to decide whether to buy, sell, or hold a company’s stock. They use financial statements to assess the company’s profitability, financial health, and future prospects.
- creditors and Lenders: Banks, bondholders, and other lenders use financial information to decide whether to grant or continue extending credit to a company. They are interested in the company’s financial health and its ability to repay its debts.
- Customers: Current and potential customers might use financial information to assess the stability of a company, especially if they are entering into long-term contracts or making significant purchases.
- Suppliers: Suppliers might use a company’s financial information to assess whether the company will be able to pay for goods or services.
- Regulatory Authorities: Government agencies and regulatory bodies like the Securities and Exchange Commission (SEC) in the U.S., or the Financial Conduct Authority (FCA) in the UK, use a company’s financial information to ensure legal compliance and protect investors.
- Analysts and Financial Media: These users interpret and communicate financial information to others. Financial analysts provide recommendations on whether to buy, sell, or hold a company’s stock. Media outlets report on a company’s financial performance and prospects.
- Competitors: Other firms in the same industry may use a company’s financial information to benchmark their performance and make strategic decisions.
- Labor Unions: If a company’s employees are members of a labor union, the union might use the company’s financial information in wage negotiations.
- General Public: The public may be interested in a company’s financial information for various reasons, such as understanding its impact on the economy or its ability to provide jobs.
Each of these external users relies on the company’s financial statements and other reports to make informed decisions. For this reason, companies must ensure that their financial reports are accurate, transparent, and adhere to established accounting principles and regulations.
Example of External Users
Let’s consider a hypothetical publicly-traded company, “HealthFusion Inc.”, which is a manufacturer of medical equipment.
- Investors: An individual who owns shares in HealthFusion Inc. would be an external user. They would use the company’s annual and quarterly financial statements to understand its financial health and performance, and to make decisions about whether to buy more shares, hold their current position, or sell their shares.
- Creditors: Suppose HealthFusion Inc. wants to take a loan for expanding its operations. The bank considering their loan application would be an external user. The bank would review HealthFusion Inc.’s financial statements to assess their ability to repay the loan.
- Customers: Hospitals and clinics considering purchasing equipment from HealthFusion Inc. would be external users. They might look at the company’s financial statements to ensure the company is stable and will be able to provide maintenance and support for the equipment in the long term.
- Regulatory Authorities: The Securities and Exchange Commission (SEC) would be an external user. They would review HealthFusion Inc.’s financial statements to ensure the company is in compliance with regulations and that it’s providing accurate and transparent information to investors and the public.
- Financial Analysts: An analyst at a research firm would be an external user. They would study HealthFusion Inc.’s financial statements to provide investment advice to their clients. They might also compare HealthFusion Inc.’s financial performance with other companies in the medical equipment industry.
- Competitors: Other medical equipment manufacturers might look at HealthFusion Inc.’s financial statements to understand their financial strategy, profitability, and market performance.
Each of these external users has different needs and uses for the financial information, but all rely on the accuracy and completeness of the information provided by HealthFusion Inc.