Financial Reporting: What It Is and Why It Is Important

As a business leader, you should always pay great attention to financial reporting in your firm since it plays a crucial role in organising 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 know what financial reporting is and why it is essential for businesses. 

What is Financial Reporting? 

The process of using financial statements to disclose a company’s performance and financial information over a particular period of time – quarterly or annually – is called financial reporting. It is a standard accounting process and 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 if they should invest in it or not. Furthermore, regulatory bodies and other government organisations 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 will not be able to make strategic decisions that can help grow your company without financial reporting. Here’s why financial reporting is vital for businesses:

It helps monitor your firm’s financial performance

Financial reporting can help you track your firm’s income and expenses better. For better debt management and budget allocation, financial reporting is vital. 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. 

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. 

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. 

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 using the data can now get an insight into your company’s finances and performance. This is a great way to build trust with stakeholders and creditors. 

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: 

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). 

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. 

Cash flow statement

A cash flow statement shows the amount of cash generated and spent by an organisation 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. 

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:

Shareholders, investors and creditors

Shareholders and investors regularly review the financial reports to understand the company’s financial position better and know if the company is generating profit. Similarly, creditors use the company’s financial report help understand how it pays off debts and decide if they should further provide credit to the organisation. 

Management

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

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. 

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. 

Regulators

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

Also read: 6 Things You Must Know About Spend Analysis

Frequently Asked Questions

What is financial reporting?

The process of tracking, analysing and reporting business income is called financial reporting. Organisations do it over a specific period, typically on a quarterly or yearly basis. 

What are the types of financial reporting? 

Financial reports or statements are essential business documents that help provide the accurate financial position of a firm. Here are the four common types of financial statements: 

• Balance sheets
• Income statements
• Cash flow statements
• Statements of shareholders’ equity

Why is financial reporting important? 

Financial reporting is crucial for businesses and investors since it gives the accurate financial position of the firm. Using this information, investors and business leaders can make crucial decisions.

What is the main part of financial reporting? 

The income statements that contain the detailed breakdown of income and expenses of a firm are the most important part of financial reporting.