In today’s fast-paced, information-obsessed world, losing sight of what matters can be easy. This is especially the case when it comes to your financial records. It is not that you don’t want to see your figures; in fact, you probably pore over them every day. The problem is that numbers alone are often not enough to convey the value or significance of what they show. Many companies are now incorporating more qualitative data in their financial statements. In other words, they’re starting to recognise the value of financial reporting, which makes it easier for customers, investors, and the general public to understand their financial information. This post will help you understand the three main types of financial reporting and their importance in tracking your organisation’s performance.
What is financial reporting?
Financial reporting can be stated as a standard accounting practice performed by businesses to analyse their overall performance. Financial reporting uses financial statements to disclose an organisation’s financial standing and performance over a period. It is typically performed annually or quarterly, depending upon the needs of the business. As a result, owners utilise such financial reports to organise accounting data and report on current financial status. Also, such reports are used to project future profitability, industry position, growth, etc. Apart from internal analysis, financial reports are also utilised by external parties like investors and government institutions to measure the overall performance of a company. Moreover, potential investors and banks use the financial reports to decide whether an organisation is worth investing in or not and evaluate its creditworthiness.
Types of financial reports
Financial reporting is executed with the help of the financial statements of a business. The financial statements are the chief documents of any organisation. They help to disclose a company’s financial details and business activities. Financial statements are duly audited by the government, accounting firms, or independent accountants to check the accuracy and completeness of records. The essence of financial reporting lies in these financial statements because they are the primary records of any organisation. The documents which serve as the primary records of a business are mentioned below:
The purpose of a balance sheet is to record the total assets, liabilities, and equity at a single point in time. Generally, balance sheets are tracked on a quarterly basis and are also used to create yearly reports. At the end of the reporting period, balance sheets provide a snapshot of the total assets, liabilities, and shareholders’ equity. In addition, they provide a real-time assessment of the current assets’ liquidity and debt coverage of businesses.
Income statements are utilised to highlight how much revenue a company has earned over a specific period of time. It is also known as a profit or loss statement or P&L statement because it summarises an organisation’s revenue, expenses, and profits. Income statements are tracked quarterly and are used to monitor the financial processes throughout the year. The “bottom line” of the statement shows how much the company has earned or lost over the period.
Cash flow statement–
A business needs a cash flow statement to know the inflows and outflows of cash. While an income statement shows whether an organisation made a profit or not, a cash flow statement talks about the amount of cash generated. The importance of a cash flow statement cannot be ignored because any business runs on cash, so it is crucial to know about the availability of cash in the business. Not just internally, cash flow statements provide valuable insights into whether a business presents a higher or lower investment risk.
Statement of shareholders’ equity–
It helps to report the changes in the value of equity of shareholders or ownership interest in an organisation from the starting to the end of an accounting period. Also known as the statement of stockholders’ equity, it is found on an organisation’s balance sheet. However, many businesses may overlook the importance of the statement of shareholders’ equity because they focus more on profit and loss or cash flow statements.
The above financial statements are the main essence of financial reporting. The information included therein is essential to execute the entire process. Using the information in the financial statements helps businesses achieve the key objectives of financial reporting. The key objectives of financial reporting include tracking cash flow, analysing shareholder’s equity, evaluating assets and liabilities, and measuring profitability. It is a critical practice, and its importance cannot be ignored. Keeping in mind its importance, let us highlight some of the essential points:
Importance of financial reporting
Cash flow management-
Cash is any organisation’s lifeblood and needs effective management. Many businesses often face cash flow challenges and unexpected market disruptions. With the help of streamlined financial reporting and reviewing of KPIs, business owners can dive deeper into revenue streams and liabilities to identify the current and future cash flow. In addition, organisations can formulate better strategies to tackle unfavourable business situations related to cash matters. With an effective cash flow management, businesses do not have to depend on third-parties to resolve their immediate cash flow problems.
With the help of enhanced and proactive reporting, organisations can record and track real-time data. The consistent recording of the relevant financial information helps to monitor and identify the risks associated with the business. With proper monitoring and identification of business risks, owners can formulate and implement such strategies that help to minimise such risks. The advantage of real-time visibility and business analysis help organisations to stay ahead in the competition and take advantage of growth opportunities.
Effective debt management is a top priority work for any business to sustain itself in the market. With enhanced financial reporting, businesses can increase their visibility into the debt-related data of the organisation. Accurate tracking and analysis of ratios between current assets and current liabilities and accounts receivable accounts payable help to maintain short-term liquidity, plan long-term debt management and adjust the workflows.
Mitigation of risk–
A business can survive and thrive in the market if it keeps up with its financial health. Effective financial reporting eliminates business risks such as inefficiencies or inaccuracies within the financial processes before they become major disasters. In addition, it prevents fraud and eliminates the chances of non-compliance with statutory requirements. With lesser business risks, business owners can grab out more opportunities in the market and reap the maximum benefit out of them.
Above all, if the reporting of financials is done properly, it can boost the overall business productivity. With all the relevant data at your fingertips and issues like cash flow and debt risk being sorted, business owners can refocus on core business activities. They will be able to make well-informed decisions without relying on plain guesswork. However, delegating such detailed accounting tasks to accounting experts is better. Business owners can hire in-house accountants or outsource the process according to their needs and requirements. However, outsourcing is a cost-effective option to opt for when it comes to bookkeeping and accounting services. In addition, the involvement of experts enhances the quality of bookkeeping and accounting services. As a result, a streamlined accounting system strengthens an organisation’s financial base, which works as a catalyst for greater business growth.