It’s critical to know how to record, administer, and arrange your business’ finances as an owner. And you can successfully achieve this through efficient financial reporting.
Financial reporting is formally recording your company’s financial activity in accounting reports. You use various insights about your organization’s financial health, giving you a better understanding of where your firm stands and how it is performing.
You can also use these reports to attract investors and stakeholders while proving your credibility and profitability. This blog will provide you with a comprehensive guide to financial reporting.
What Is Financial Reporting?
The practice of recording and reporting financial operations and their results across defined periods, usually annually or quarterly, is known as financial reporting. Financial reports help businesses analyse their performance and make decisions accordingly for the upcoming year.
They also help with projecting future growth, industry position, and profitability. When reporting financial data, you have to evaluate profitability, assess the value of your company’s stocks, determine the value of liabilities and assets, and track cash flow.
Financial reporting involves the generation of 4 main financial statements:
- The statement of changes in equity
- The cash flow statement
- The income statement
- The balance sheet
These documents outline your company’s profitability, the assets and equity of your business, and the flow of cash.
Importance of Financial Reporting
1. Ensures Compliance
When reporting finances, companies have to comply with multiple standards set out by the government about how companies should run.
This meticulous record keeping verifies that all financial reports adhere to financial reporting standards and tax legislation. Financial reporting also makes auditing, valuation, and tax processes easier, saving time on essential financial tasks and ensuring compliance.
2. Communicates Critical Information to Attract Investors and Creditors
Current financial data helps investors, executives, and shareholders to track performance create budgets, and make choices. Financial reporting promotes transparency and open communication that supports the financial review, investment opportunities, and funding.
Most creditors and investors rely on these financial documents to estimate future returns, risk, and profitability. It demonstrates to third parties that your business is dependable, professional, and honest in its practices. It also informs them of what they might anticipate from you in the future.
For example, investors are interested in your sales and net profit to determine whether the investment is worthwhile to your company. Creditors examine cash flow statements to assess a company’s capacity to satisfy invoice payments, loan repayments, and other financial obligations.
3. Helps Track Expenses and Income
Financial reporting aids timely tracking of expenses and revenues. Financial monitoring helps with budget allocation and managing your debt effectively. It gives you a clear-cut idea of areas that are performing well and those that require special attention.
It brings forth aspects of business that need more funding to perform better and those that have an extra budget which you can allocate to other departments. It helps make informed decisions to stay transparent in competitive markets.
Indicators, such as debt-to-asset ratios, also help attract investors who assess your company’s ability to pay off debt and generate a profit using this financial paperwork.
4. Aids in the Financial Analysis and Decision-Making Process
Financial reporting is vital for analysing company performance and making the right choices. The use of financial statements enhances accountability and facilitates the examination of crucial accounting data.
Balance sheets and income statements provide real-time data that you may use to make accurate forecasts, identify critical areas of spending, and examine historical performance.
They can use financial reports to identify asset value, re-investment prospects, booming departments, best-selling items and services, and several other real-time financial insights and metrics to make educated decisions. Reporting aids firms in evaluating current activities and planning for growth in the future.
Types of Financial Reports
There are 4 main types of financial statements
1. Balance Sheet
The balance sheet is a financial statement that details the company’s assets, liabilities, and equity. It follows the equation:
Assets = Liabilities + Owner’s Equity
Assets are the resources that a corporation holds to run its operations. Assets are of two types: current and fixed. Current assets are simple to dispose of and are entirely cash-based.
Fixed assets are difficult to liquidate and turn into cash in a year. They are usually for the long run, such as property, plant, equipment, automobiles, etc.
Liabilities are debts that a firm owes to third parties, usually as money. Obligations in the business world are of two categories: current and long-term liabilities.
Amounts due within the next twelve months are current obligations, such as accounts payable, accruing expenses, and other short-term debts. Items that are due after a year are long-term liabilities. These include any long-term loans from external parties or present stockholders.
After paying off all the debts and liquidating all assets, equity, also known as shareholder’s equity, illustrates the amount of money that will be the legitimate possession of a company’s shareholders.
Equity shows a company’s overall worth and is a critical instrument for evaluating a company’s financial health in mergers and acquisitions.
2. Cash Flow Statement
A cash flow statement can be annual, quarterly, or monthly. It displays all of your company’s outflows and inflows over time.
All changes to the balance sheet and current operational results, such as accounts receivable and payable, are included. However, non-cash accounting items, such as amortization and depreciation, aren’t included in business cash flow statements.
A cash flow statement is a financial statement that shows a company’s short-term liquidity, viability, and capacity to repay its debts.
There are three sections to a cash flow statement:
- Investing operations include the sale and purchase of long-term assets, including investment securities, equipment, plant, and real estate.
- Operating activities compare net income to cash used and collected in business operations to determine cash flow.
- Financing operations are the funds raised through bank loans or the sale of bonds and stocks.
3. Statement of Changes in Equity
A statement of retained earnings, also known as the statement of changes in equity, shows how the owner’s equity has changed over time. It highlights the net profit or loss, withdrawal of capital, investments, dividends, and earned profits.
4. Income Statement
The most typical financial statement is an income statement, which measures a company’s financial performance annually, quarterly, or monthly.
It depicts the company’s entire expenses and revenue, including non-cash accounting such as amortization and depreciation. It evaluates the money earned, spent, and profit or loss incurred because of the revenue and expenses to determine a company’s success.
The profit or loss on the income statement, also called net burn or net profit, is then used to calculate cash flow from operations. The first line item on the cash flow statement is the net burn or net profit.
The income statement is divided into two sections:
- Operating activities, such as distributing, selling, procuring, and manufacturing goods and services, are significant to the company’s day-to-day operations.
- Non-operating activities include the acquisition and sale of foreign exchange losses and gains, interest, taxes, dividend payments, assets, and investments, among other things.
Who Uses Financial Statements?
Financial reporting is a necessary part of practically every industry. Corporations and businesses rely on financial document review and analysis to make informed financial decisions and secure funding.
Financial institutions also use these reports to assess performance, profitability, and compliance to issue credit. Here’s a list of professionals who use financial reports.
1. Executive Managers
Financial reporting systems help executive teams and directors to analyse performance and modify business operations. It helps decision-making, which further helps with setting goals and objectives.
2. Creditors, Shareholders, and Investors
Shareholders and investors own firm stock and examine various accounting reports to determine how businesses make money. Creditors also evaluate financial report data to figure out if companies can pay off debts and whether or not to lend to build their businesses.
3. Regulatory Agencies
Regulatory institutions collect and analyse corporate data from financial reports. Financial reporting operations for tax and revenue documentation are monitored by government bodies such as the HM Revenue & Customs (HMRC) and the Securities Exchange Commission (SEC) monitor these financial reports for revenue and tax verification.
4. Employees and Unions
Unions that represent employees keep a close eye on financial reports to guarantee that their members are paid fairly and treated fairly in the workplace. Employees can use financial statements to obtain insight into their company’s financial health and long-term success.
Financial reporting is also crucial for informing people about company actions and creating market openness. Open communication with people about charitable events, investment opportunities, and earnings keeps them informed and can generate extra sales.
Mistakes to Avoid When Maintaining Financial Records
1. The Inability to Reconcile
When recording and reporting, reconciliation is crucial. It guarantees that all of your records are in order, there are no errors or omissions, and everything is in its proper position. Reconciliation can be a time-consuming process.
Many small business owners overlook it, resulting in future complications. You will be able to notice and retort to faults better and in time if you do it regularly. You can automate the reconciliation process using accounting software.
2. Not Using a Software
One of the most common errors made by small businesses is failing to use bookkeeping and accounting software. It’s critical to keep both digital and paper versions of your documents, and good accounting software should be at the top of your purchasing list.
Invoicing, purchases, and financial reporting are all easier using this software.For number crunching, most small firms rely on Excel. Even though Excel is useful for calculations, it does not allow automated invoicing and record-keeping.
Accounting software automates all operations and assures that you won’t have any problems if your company is audited.
3. Not Being Aware Of Your Financial Situation
Another common blunder made by small business entrepreneurs is a lack of grasp of the financials involved in the process. It is critical to have a thorough understanding of your company’s finances at all times.
It is easier to conduct the reporting process when you better understand the elements on your balance sheet, income statement, and cash flow statement. Having a clear picture of your finances might help you make more informed decisions.
4. Not Hiring an Accountant
The most common blunder made by small businesses is failing to hire an accountant to handle their accounts. Consider hiring an outside accountant as a long-term investment that will pay off during tax season when you won’t have to worry about your taxes.
They will ensure that all reporting is done timely and your business adheres to relevant rules and regulations.
Hire Expert Chartered Accountants and Business Advisors in Walsall
Hiring a professional accountant to handle your financial reporting and record-keeping is always a good idea. Assigning your complex financial needs to be handled by a chartered tax advisor and accountant allows you to focus on expanding and growing your business.
You can’t go wrong with IBISS & CO if you’re looking for a professional chartered accounting firm in Walsall that can manage all of your tax and accounting concerns.
Our professionals will work directly with you to organize and manage your taxes and accounts, ensuring that self-assessment tax returns and audits are submitted on time.
We recently inaugurated our office in Walsall. We’ve earned a reputation for offering high-quality accounting services, and we’ve become the go-to firm for many Walsall businesses. Our cost-effective packages, extensive expertise, and experience have helped us establish ourselves as a dependable financial service provider in the UK.
Our team of expert chartered accounts and business advisors in the UK has significant experience dealing with complex accounting matters.
Contact us today for more information.