Financial Reporting: What It Is and Why It Is Important

Introduction to Financial Reporting

As a business leader, you should always pay great attention to financial reporting in your firm since it plays a crucial role in organizing and managing your company’s finances. Looking to learn everything about financial reporting? Fret not—we have done all the legwork for you. Read the post to learn what financial reporting is and why it is essential for businesses. 

What is Financial Reporting? 

Financial reporting is the process of using financial statements to disclose a company’s performance and financial information over a particular period of time—quarterly or annually—and is a standard accounting process that gives a clear picture of the firm’s financial status. 

Banks and other potential investors will also consider your firm’s financial reporting to gauge how healthy your business is and then decide whether they should invest in it. Furthermore, regulatory bodies and other government organizations will monitor your financial reporting to ensure fairness. 

Why is Financial Reporting Important? 

You will never know your firm’s accurate financial status without financial reporting. Also, you cannot make strategic decisions that can help grow your company without financial reporting. Here’s why financial reporting is vital for businesses:

1. It helps monitor your firm’s financial performance

Financial reporting can help you track your firm’s income and expenses better. It is vital for better debt management and budget allocation. Financial statements will also give you a clearer picture of your firm’s capital, cash flow, revenues, expenses, etc. Furthermore, using the statements, you can find any discrepancies and fix them immediately before things get out of control. 

2. It ensures compliance

Financial reporting is essential to ensure the company complies with financial laws, taxes, and other requirements. Additionally, it makes your tax and auditing process simple and hassle-free. 

3. Compare actual results vs budget

By comparing the financial results with your budget, you can easily find if they are both aligned. Financial reporting results can help you adjust and ensure you are on the right track financially. 

4. Transparency

Having accessible and open financial data allows multiple departments and business leaders in your firm to be on the same page. Employees and the management can use these vital financial data to make significant and strategic decisions. 

Also, external stakeholders and prospective funders can now use the data to gain insight into your company’s finances and performance. This is a great way to build trust with stakeholders and creditors. 

5. Helps in decision-making and financial analysis

Financial reporting is essential in performing financial analysis and making important business decisions. You can use the data to find areas where you are overspending. And it will help forecast the future budget more accurately.

Also read: Cash Flow Forecasting and How to Ace It

What are the Types of Financial Reports? 

Here are the types of financial statements that feature in financial reports. They are: 

1. Balance sheet

The balance sheet is one of the most important financial statements. It provides information about the firm’s financial health at a given point in time. A balance sheet contains key financial information of the company like assets, liabilities, and equity (shareholder/owners). 

2. Income statement/profit and loss statement

The income statement, also known as the profit and loss statement, sums up the firm’s expenses, profit and loss for a specific period of time. The income statement determines how much the company has earned or lost over a period of time. In short, the income statement defines your firm’s bottom line or net income. 

3. Cash flow statement

A cash flow statement shows the amount of cash generated and spent by an organization over a period of time. The cash flow statement is based on a firm’s operating, investing, and financial activities. The cash flow statement offers potential investors a better view of your company’s financial position. 

4. Statement of shareholder equity

Large enterprises document shareholders’ equity as a separate document. Whereas medium and small companies often include them in their balance sheets. The statement of shareholder equity contains information about how much owners and key stakeholders invest in the company. 

Furthermore, the statement of changes in equity is of great importance for investors since it will contain transactions that are not recorded in the balance sheet and the company’s income statement. This information will help investors make informed decisions.

Who Uses Financial Reports?

A number of parties make important decisions based on a firm’s financial reports. Here are some of the common users of financial reports:

1. Shareholders, investors and creditors

Shareholders and investors regularly review the financial reports to better understand the company’s financial position and determine whether it is generating profit. Similarly, creditors use the company’s financial reports to help them understand how it pays off debts and decide whether to provide further credit to the organization. 

2. Management

The financial report is the Bible for business managers—no, that is not an overstatement. Let us tell you why. Business managers use financial reports to review performance and devise plans based on them. Moreover, they rely on financial reports to make every strategic decision, like adjusting the firm’s finances and operations. 

3. Customers

Customers take a look at the business’s financial reports before making a purchase. Financial statements also educate consumers about the company’s financial activities, empowering them to make better decisions. 

4. Employees

Employees and unions can use financial reports to make sure the employees receive fair wages. It can help employees understand the profitability of the company and its long-term stability. 

5. Regulators

Regulatory institutions also go through the financial reports to ensure compliance. This process ensures businesses do not violate any financial laws. 

Also read: 6 Things You Must Know About Spend Analysis

Frequently Asked Questions