Financial analysis and reporting is the backbone of modern businesses. Financial reporting is considered to be a compulsory legal requirement (in every country) but at the same time, it also holds huge potential which should be explored for improvising the growth and development of your business.
A recent report by McKinsey suggests that leveraging data to create more proficient marketing reports and making informed decisions can boost marketing productivity by 15-20%, which translates to as much as $200 billion based on average annual global marketing spend of $1 trillion per year.
How about putting this logic to the financial sectors? It’s obvious that financial reporting tools will benefit your business by giving a more informed snapshot of your business activities.
Before digging deep into the potential part, let’s trifle more down into earth knowledge about financial reporting.
Highlights of the blog
Getting down to the brass tacks, this blog has been able to answer most of your questions, like:
- What do you mean by financial reporting?
- What are the objectives of financial reporting?
- What are the benefits of financial reporting?
- What is the importance of financial reporting?
- What are the types of financial reporting?
What Is Financial Reporting?
Financial reporting is known as the disclosure of financial information to the external management or stakeholder about the overall performance of a company over a specific time period.
This report helps owners, managers, investors, government institutions and employees to make relevant decisions about their businesses. To make the work simple, there are many financial reporting software that offers loads of information on investment, cash flow and likewise.
They are issued on a quarterly and monthly basis and includes the following:
- Balance Sheet/Statement of Financial Position: reports on the company’s assets, liabilities, equity for a given period of time, especially at the end of a fiscal quarter or year.
- Profit and Loss Report/Income Statement: includes the company’s income, profits calculated over a fiscal quarter or a year, sales and expenses experienced for a stated period.
- Statement of Changes in Equity/Statement of Retained Earnings: highlights the changes in the company’s equity for over a year.
- Cash Flow Statements: comprises of a company’s operation, investment and financial operations. It mostly refers to the sources and uses of cash where you keep a close track of all the flow of money in the company.
In case, the organization is publicly held, then you require the following:
- Quarterly 10-Q form and the annual 10-K form that are filed with the Securities and Exchange Commission.
- A wrap report comprising of an annual report issue to shareholders.
- List of press releases speaking about the financial information of the company.
- A curated list of earning calls, a teleconference or webcast wherein the public company discusses the financial reports of a definite time period.
The financial reports of publicly held corporations are quite detailed and complex with footnotes, management discussion and analysis (MD&A) and insights into the accounting method. It’s like giving details about each penny spent!
Move down to understand the objectives and purpose of financial reporting.
Objectives Of Financial Reporting
s per the International Accounting Standard Board (IASB), the primary objective of financial reporting is to provide financial information, performance, position and changes that might help in making economic decisions.
1. Provide necessary financial information to the higher authority that will help in benchmarking, analysis and decision making.
2. Provide information to investors, stakeholders, debt providers, promoters and creditors to take decisions regarding investment, credit etc.
3. Provide information to stakeholders and the public about various aspects of the business (in the case of listed companies).
4. Provide information about the economic resources such as liabilities, owners equity, etc. and the changes undergone over a stated period.
5. Information on how the business is procuring and utilizing resources.
6. Information regarding performance management and how diligently and ethically the responsibilities are carried.
7. Financial information to the statutory auditors to review the financial records of the company to check its fairness and accuracy.
8. Fostering social welfare by considering the interests of the employees, government, trade union, etc.
Since you got to know about the objectives, let’s move down to understand why financial reporting is important for a business.
Benefits Of Financial Reporting
The primary benefit of preparing financial reporting is to calculate the profit and losses experienced by the company. Head down to know more.
- Helps in managing your debts
Many companies have been shut down under the burden of debt. It is known that debt management is very crucial pertaining to the progress of the company.
Whichever type of financial reporting you prefer, all solutions will aid in tracking your current assets divided by current liabilities on your balance, that will measure your liquidity and manage your debts accurately.
- Aids in identifying trends
All kinds of reporting will help in identifying trends from the past, present and future. This will help you in effectively handling your weaknesses and bring potential changes or improvements to benefit the business. - Leverages with real-time insights
It helps in gaining access to centralized and real-time insights for taking accurate decisions as you maintain your financial fluidity. - Manage your liabilities
To improve your company’s financial health, you need to manage and maintain your business loans, credit cards, credit lines and such. This can facilitate with exploring financial statement data if you need to reduce your liabilities before an official statement.- It helps in the statutory audit. A statutory auditor helps in auditing the financial statements to express their opinions.
- It helps in raising your capital; domestic and overseas.
- It is helpful in labour contracts, bidding, government supplies, etc.
- It gives an outline of the stature and performance of the business.
After answering the ‘how’, it’s time to understand the role of financial reporting and three main factors that define its importance.
What Is The Importance Of Financial Reporting?
There are three main factors:
1. According to the law, financial reporting is mandatory for tax purposes.
2. It gives credibility and integrity to the investors and creditors of your business.
3. It gives a clear idea to make a better business decision.
Also, take a glance at the three types of financial reporting used in a business.
Types Of Financial Reporting
A financial report is sometimes also referred to as a financial statement.
There are three common types of financial reporting:
This written report quantitatively explains the financial status of the business through accurate and detailed information. A typical financial report comprises of these:
- Income statement
These financial reports have a list of revenues and expenses of a business for a specific period. Depending on the net income and net losses, the crux of the business can be determined. You need to be ready with an income report annually, quarterly and annually. - Cash flow statement
It resembles all the resources that a company uses for a fixed period. It consists of revenues, sales of non-current assets, long-term financing, increase in a liability account, decrease in the current asset, operating loses, equipment purchases, debt repayment and such. - Balance sheet
The balance sheet equation shows that the value of a company’s asset is equal to the sum of its liabilities and owner’s equity. The report includes everything the company possess, debts incurred, the value of ownership stake in the company’s equity etc. It resembles the financial position of a company. - Statement of capital
It speaks about the change in the owner’s capital accounts over time. The report shows the total amount of funds and assets invested by investors and stakeholders over a definite time.
However, the statement of capital is prepared after the income statement. This gives businesses a holistic view of their net income and losses.
Financial reporting gives business owners a valuable and accurate perspective on the overall development of their businesses. It is important to review them periodically with an accountant for expert advice on improving the business operations.
Like it or not, financial reporting is a must procedure for all business sectors. Your work can be made simple by using several available financial reporting software that gives you all the benefit from preparing, managing and even presenting them.
RNC is a leading valuation services advisor and is indulged in providing expert advice on financial reporting, bank lending, dispute resolution and more. How about visiting our multidisciplinary team to know more about financial reporting!