The Information Needs of Creditors

The information needs of creditors

We may define as creditors all those who have provided goods, money or services to business organizations and have accepted a delay in payment or repayment. Creditors may be short-term or long-term lenders. Short-term creditors include suppliers of materials and goods, normally described as trade creditors, credit institutions such as bankers and hire-purchase firms who lend money for interest on a relatively short-term basis, and those who have provided services and are awaiting payment, for example, employees, outside contractors who have made repairs, electricity and gas undertakings who have presented accounts and have not yet been paid. Long-term creditors are those who have lent money for a long period, usually in the form of secured loans.

The main concern of creditors is whether or not the organization is credit-worthy, that is, will it be able to meet its financial obligations? They are interested in the organization's profitability only insofar as it affects its ability to pay its debts. On the other hand, creditors are very concerned with the firm's liquidity, that is, those cash or near-cash resources which may be mobilized to pay them, as well as the willingness of banks and other creditors to act like them in being willing to await payment. Creditors react quickly to changes of opinion about a firm's credit-worthiness, and if there is any doubt that a firm may not be able to pay, they will press for immediate settlement of debts owing and probably drive into bankruptcy a firm whose prospects in the medium and longer term are not necessarily bad.

Creditors are interested, therefore, mainly in financial accounting information which deals with solvency, liquidity and profitability, that is, with obtaining reports which will describe a firm's financial standing. We shall consider these aspects of financial reporting in Part 2, and in particular, we shall examine the adequacy of criteria applied to the analysis of financial statements, such as solvency, liquidity and profitability ratios.

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Read on: The Information Needs of Governments

The information needs of governments

To a greater or lesser degree, all Western governments intervene in the activities of business organizations in the process of managing what is known as a 'mixed economy', that is, an economic system consisting of both State-controlled and privately controlled business organizations. Government Agencies, such as Central Statistical Services, Ministries of Commerce, Industry, Employment etc., all collect information about the various aspects of the activities of business organizations. Much of this information is a direct output of the accounting system,... see: The Information Needs of Governments