What is Financial Reporting?
What is Financial Reporting?
What is Financial Reporting?
For many businesses, the growth and expansion phase is an exciting time. It creates new opportunities, brings in new customers, and generates more revenue and higher profits. However, if your team lacks crucial financial reporting and analysis capabilities, making informed decisions to manage and grow your business can be challenging.
So, what is financial reporting, exactly? Financial reporting is the process of documenting and communicating financial activities and performance over specific period of time, typically on a quarterly or yearly basis. Companies use financial reports to organize accounting data and report on current financial status. Financial reports are also essential in the projections of future profitability, industry position and growth, and many financial reports are available for public review. There are several primary statements to use when reporting financial data, and the information you include in these documents fulfills several key objectives of financial reporting:
Financial reporting is the comprehensive review of monthly, quarterly, or yearly financial data to drive better business performance and results. A timely and accurate financial reporting process helps you understand your company’s performance and identify opportunities.
Importance of Financial Reporting
1.Financial Reporting monitors income and expenditure of a company
2.It communicate essential data
3.It ensures compliance with relevant standards
4.It supports financial analysis and decision making
Types of Financial Reporting
1.Statement of financial position
Statement of financial position records the total assets, liabilities and equity you currently possess. A quick review of the balance sheet can show you the total assets, minus the equity and liabilities. Businesses track balance sheets quarterly and may include data from statement of financial position when creating yearly reports. Statement of financial position also provide a real-time assessment of your current asset liquidity and debt coverage.
2.Income Statement
The income statement shows performance for revenue, net income, expenses and earnings per capital share if companies open shares on the stock exchange. The income statement is the same document for reporting profits and losses, and some businesses refer to the income statement as the profit-and-loss statement, or P&L statement. There are several key elements on this document:
3.Statement of cash flow
The cash flow statement is important for measuring the efficiency with which companies generate cash to pay down debts. Documentation of cash flow also encompasses how well businesses fund operations and investments. Accurate cash flow statements are important for understanding the efficiency of current practices, spending activities and revenue generation.
4.Statement of changes in equity
Shareholders’ equity typically appears on the balance sheet, however, larger corporations may document these activities on separate statements. The statement of shareholder equity serves this purpose and includes the amounts key stakeholders and owners invest in a company. These investments include company stocks and securities, which pay out dividends at certain periods. Additional items on a statement of shareholder equity that companies generally review include:
5.Notes to the Financial Statements
Notes to the financial statements contain detailed information on the accounting decisions made by accountants during the creation of the financial statements as well as explanations of important factors that impact line items.
Why Is Financial Reporting Important for Everyone?
The main goal of finance reporting is to help finance, business partners, department leaders, and stakeholders make strategic decisions about a company’s operational activities, growth, and future profitability based on its overall financial health and stability.
At a minimum, quarterly financial reports and annual reports are required for public companies, while internal measurement is performed monthly.
A periodic valuation of a company’s financial performance and stability helps to accomplish the following:
Improve Business Agility and Partnership
Accurately tracking and analyzing a business’s finances improves agility by giving the business and finance teams direct insights into the company’s performance. Financial statements include detailed information on an organization’s revenues, expenses, profits, capital, and cash flow—these are used to track historical performance, identify key areas of spending, and create forecasts.
Maintain Transparency
Open and complete access to a company’s financial data helps build trust and solidify relationships with the business. This is because departments, and business leaders rely on current financial data to make decisions, and track results.
Ensure Compliance and Completeness
Compliance and completeness are vital to accounting teams and should also be a core pillar for finance teams, the business, and executives. Compliance with all core accounting, investor, and industry guidelines and rules is vital for the trust of those financial statements.
Cashflow Optimization & Inspection
Cash is king, and it is one of the most important key performance indicators (KPIs) upon which the financial health of a business is measured. Financial reporting allows finance teams and the business to track and analyze cash inflows and outflows to help identify current and future cash flow risks. This ensures the organization has sufficient cash flow to grow the business and take advantage of opportunities when they arise.
Key Types of Financial Reports
Financial statements and reports give the business a picture of an organization’s financial position. In general, there are four types of financial statements:
1. Balance Sheet
A balance sheet provides a snapshot of an organization’s financial health at a particular time. As such, it’s the most important of the four financial statements.Balance sheets help a business determine its true net worth because they lay out the assets (what a company owns), liabilities (what a company owes), and shareholder equity/owner’s equity (the difference between the two).
2. Profit and Loss Statement
This financial statement, also known as a P&L report or Income Statement, shows your company’s net income and expenses and profits or losses during a specified period. It gives you a clear picture of your company’s profitability.Creditors and investors often combine financial information from the P&L together with insights from the other three financial statements to determine whether the business is worth investing in or providing financial assistance.
3. Cash Flow Statement
The cash flow statement, or the statement of cash flows, outlines how much cash a business generates and spends over a certain period. It is based on a company’s operating, investing, and financing activities.This statement gives the business insights into the liquidity and solvency of a firm. It lets them know how a business manages its cash for operating, paying off debt, and funding current expenses or future investments.
4. Statement of Changes in Equity
This financial statement reports on a company’s changes in retained earnings after dividends are released to stockholders. It allows stakeholders to see what factors caused a change in owner’s equity during the accounting period.The Statement of Changes in Equity is also important because it includes transactions not recorded in a company’s income statement and balance sheet, such as equity withdrawal and dividend payments.
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