2 - Decision Making & Stakeholders

Accounting

The process of identifying, measuring and communicating economic information about an entity to a variety of users for decision-making purposes

Purpose of accounting

Inform the decision-making of stakeholders

Investing decision

Long-term forward-looking decision that creates future value (e.g. buy new manufacturing equipment, sell old equipment)

Operating decision

Decision that affects the business at the moment (e.g. prices, wages, offering credit, raw materials needed)

Financing decision

How to get money and where it comes from (e.g. loan from a credit provider, issuing shares, paying dividends)

Internal stakeholders

Management and employees

Management as a stakeholder

Makes strategic and operating decisions for owners within laws and social norms; in startups (founders = owners) cares about financial value; in mature companies cares about compensation

Employees as stakeholders

Fulfil defined roles in running the firm; concerned with compensation, career progression, solvency, work-life balance and culture

Creditors

Lend money for a fixed return (interest) with no control rights until default; main concern is downside risk and solvency

Owners and shareholders

Own equity and have rights giving some control over decisions; main concerns are upside potential and solvency

Creditor vs shareholder payoff

Creditors receive a capped fixed return; shareholders receive the residual so have unlimited upside

Suppliers

Sell goods or services to the firm for money; main concern is solvency (will they get paid)

Customers

Buy goods or services for money; concerned with value for money, product quality and safety; accounting gives end customers little valuable information

Regulators and general public

Represent stakeholders with limited power (retail investors, environment, future generations, local communities); concerned with public goods, environmental and social impacts and compliance