The results of how your enterprise has fared are crucial for your staff and investors. When you provide interested parties information regarding how successful your business has been, it enables them to make informed decisions. This is where financial reporting comes in handy. It is a tool that allows you to share details about your business activities with various key players. Continue reading to learn more about financial reporting and how it helps your business.
What is financial reporting?
Financial reporting consists of a company's financial results that are provided to the stakeholders and the public. This kind of reporting is usually carried out by the controller, who an investor relations officer may also assist in the case of public companies.
Essentially, financial reporting involves issuing financial statements, which include the income statements, balance sheet, and cash flow statement. The report may also consist of footnote disclosures or other additional financial information you decide to disclose. You can also issue annual reports to shareholders and a prospectus to potential investors as part of financial reporting.
What are the components of a financial report?
The components of a financial report are described in detail below:
Income statement: It comprises a summary of a business's sales, expenses, and profits for a specific period of time. Since this report showcases your company's financial performance, it is more closely viewed than the others.
Balance sheet: It presents an aggregated view of the business’ assets and liabilities and the shareholders' equity for a specific date. A balance sheet helps examine a business's liquidity and gauge its capability to pay off debts.
Cash flow statement: It provides an aggregated view of a business's cash flow related to its operations and financing and investing activities. It helps determine the viability of a business by examining how cash is used within the company. Read more about cash flow statements here.
Statement of retained earnings: It itemises the changes in a company’s retained earnings during the reporting period. Do note that this report is usually excluded from the financial reporting statement.
What is the importance of financial reporting?
Financial reports are extremely useful for your business and provide the following benefits:
Monitoring financial performance: Financial information helps you monitor revenue and expenses and cash flow with the company to ascertain your company's financial position. Such information also helps you gauge if the business is running as expected or if issues need to be addressed.
Comparison: Financial reporting is a key tool required to check how your business's actual performance holds up compared to the budget allotted. It helps you make adjustments to ensure that business plans align with the on-ground reality.
Create ratios: Outside parties also use financial reports to construct a range of ratios. These ratios are compared against industry standards to evaluate your company's financial stability and performance.
Compliance: Lastly, financial reporting helps you ensure that your business complies with legal, tax, and regulatory requirements. While a public limited company has to send such reports to the Securities and Exchange Commission, they are also required while filing income tax returns.
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