What is Financial Reporting?
What is financial reporting? Do you know?
Better yet, do you know how financial reports can be useful to you and your business?
If you don't, you're not alone. Most people simply understand financial reporting is for public companies and leave it at that.
The truth is, though, that any company, public or private, can benefit immensely from financial reporting.
The process helps us understand our business better, and helps us convey our business in financial terms to investors or potential investors.
But it all starts with understanding the definition of financial reporting, its purpose, and how it can serve you.
And that's what today's post is all about, so let's get started.
What is Financial Reporting?
A general definition of financial reporting is any financial information issued to the public, including press releases, management's discussion and analysis (MD&A), shareholder minutes and reports for regulators.
Financial reporting is usually spearheaded by a company's Chief Accounting Officer. The CAO often collaborates with the Investor Relations Officer, as financial reports are usually intended for shareholders and potential investors.
Increasingly, many businesses are outsourcing the process to professional tax and accounting services.
These financial reports must be accurate as they are often audited by government agencies and accounting firms for tax.
What Purpose Does Financial Reporting Serve Your Business?
Financial reporting serves two primary functions for your business.
First, the process of creating financial reports initiates an executive review of your business's strategic objectives and is a key tool for future decision-making.
Effective reports should highlight your company's strengths and weaknesses and provide an overall picture of its fiscal health.
Second, if your company is publicly traded, financial reporting must inform your stakeholders of the financial health of your organization.
The Securities and Exchange Commission (SEC) requires companies to provide detailed financial reports to its shareholders, potential investors, regulators and to consumers at large.
The process of financial reporting creates excellent opportunities for your company to:
- Gain a thorough view of your business's financial health.
- Identify areas of opportunity and areas which need improvement.
- Convey information to the public, meet regulatory requirements, and create goodwill with stakeholders.
You don't want to work in a vacuum.
Letting the public in on your status as a company is a great way to get feedback and assure stakeholders.
It also helps you attract potential investors.
In general, it gives you the chance to prove that your company is above-board and transparent.
What Information Does Financial Reporting Include?
Financial reporting is usually broken down into four components. The goal is to provide all pertinent financial information about your company.
1. Income Statements
Income statements are either annual or quarterly. They provide information for each specified range of time.
These reports give a detailed overview of revenue, expenses, net income and earnings per share.
Most income statements provide additional data from the previous two or three years as a basis for comparison.
2. Balance Sheets
The accounting format of a balance sheet is Assets = Liabilities + Equity Accounts. This report gives a detailed analysis of each of these three areas.
The balances listed are accurate for a specific date stated on the report, usually the end of the fiscal year.
The balance sheet helps investors and stakeholders determine the liquidity of your business. It reveals how well your company pays its debts.
3. Statements of Cash Flows
As its name implies, this report focuses on the cash flows into and out of your business:
It is often used to shed light on performance trends, which may not be evident in the other business statements.
This is especially helpful to reconcile any differences between profits reported and net cash flow.
You now have a better understanding when someone asks the question; "What is financial reporting?
Would like some more information or help with your accounting and reports? We'd love to help you.
We offer a variety of services to help your company meet your accounting needs.
Contact us for a free consultation today.