What Is Financial Reporting and Why Is It Important to the Business?
For many businesses, growth and expansion create new opportunities, bring in new customers, and generate more revenue and higher profits.
But, if your team lacks crucial financial reporting and analysis capabilities, making strategic decisions that can sustain and increase business growth and profitability can be challenging.
So, what is financial reporting, exactly? Simply put, financial reporting is the detailed review of a company’s financial data over a specific period, usually a month, a quarter, or a year. The aim is to inform decision-makers so they can improve business performance and results.
What is the objective of financial reporting?
The main objective of financial reporting is to provide stakeholders with accurate and timely information regarding a company’s financial performance and position.
But delivering financial reports starts with the gathering of accurate data, and that relies on having the right systems in place.
Financial reporting tools, like Planful, are designed to accelerate, streamline, and automate the financial reporting process. They can integrate with various operational, accounting, and other business systems, provide easy access to relevant data, simplify analysis with user-friendly interfaces and visualizations, and ensure the accuracy and comprehensiveness of the data you’re analyzing.
Accurate data enables executives, team leaders, investors, creditors, regulators, and others to make informed decisions about allocating resources, assessing risks, and evaluating the company’s overall health and trajectory.
Why is financial reporting important for everyone?
Financial reporting is a periodic evaluation of a company’s financial performance and stability.
It helps finance teams, business decision-makers, department leaders, and other stakeholders make better, more informed decisions about a company’s operational activities, growth, and future profitability based on its recent financial health and future financial potential.
Financial reports come in various forms, each serving a specific purpose.
For example, quarterly financial reports and annual reports are required for public companies to provide a comprehensive overview of their financial performance. But internal financial reporting is designed to drive business success. These more detailed, focused, and customized internal financial reports are typically generated weekly or monthly to track ongoing financial performance and identify areas for improvement.
Financial reporting improves business agility
Your business leaders want fast access to financial data to properly evaluate the effectiveness of recent decisions. Accurate reporting allows your finance team to be as agile as possible to provide the data leaders need to understand business performance.
Clear and understandable financial statements can translate into business clarity, connection, and action, making you feel more informed and knowledgeable about your business’s financial health and the outcome of your decisions.
Financial reports also help organizations identify trends, mitigate potential risks, avoid obstacles, stay ahead of the competition, recognize market changes, and take advantage of any opportunities for growth and investment.
Financial reporting maintains transparency
Easy access to a company’s financial data helps build trust and solidify relationships between finance and the business. Departments, teams, and business leaders rely on timely financial data to make decisions, plan budgets, and track results.
Financial reports provide insight for stakeholders to understand your company’s direction and performance. Finance teams can set a collaborative tone by proactively communicating and partnering with stakeholders across the business to understand, analyze, and act on financial data.
Financial reporting gives insight into cash flow optimization and inspection
Cash is king, and it’s one of the most important key performance indicators (KPIs) to measure when evaluating the financial health of a business.
Financial reporting allows finance teams and the business to track and analyze cash inflows and outflows and identify current and future cash flow risks. This ensures the organization has sufficient cash to grow the business and take advantage of opportunities when they arise.
Also, finance teams are crucial in helping the business understand why cash flow matters, how it’s tracked, and where opportunities, threats, challenges, and risks might be present.
Four types of financial reports
No matter the format, financial reports always include detailed information on an organization’s revenues, expenses, profits, capital, cash flow, and other financial metrics to track historical performance, identify key areas of improvement, and create forecasts of potential future performance.
These financial reports are also a key mechanism finance teams use to communicate with their business partners. That’s because the goal of a finance team is not just reporting the numbers but in aligning resources and the business to achieve strategic goals.
Let’s walk through four types of financial statements most finance teams leverage.
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 by laying out its 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
The profit and loss financial statement, often called a P&L report or income statement, shows your company’s net income, expenses, and profits or losses during a specified period. It gives you a clear picture of your company’s profitability.
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’s based on a company’s operating, investing, and financing activities.
This statement gives business insights into a firm’s liquidity and solvency. It tells you how the business manages its cash for operating, paying off debt, and funding current expenses or future investments.
A cash flow statement also helps lenders and investors determine the possibility of repayment.
4. Statement of changes in equity
The Statement of Changes in Equity reports on a company’s changes in retained earnings after dividends are released to stockholders. It allows stakeholders to see what factors caused a shift in owner’s equity during the accounting period.
This document is essential because it includes transactions not recorded in a company’s income statement and balance sheet, such as equity withdrawal and dividend payments.
As a results, it is a helpful resource for shareholders and investors make more informed investment decisions.
Revamp your financial reporting through predictive analysis
A successfully growing business is always looking ahead, being agile, and proactively making adjustments with better decisions — all of which can happen thanks to financial reporting.
An investment in proper financial reporting software and technology turns financial reporting from frustrating admin into a collaborative team sport, where Finance partners with the business to drive financial and business success.
Thanks to artificial intelligence (AI) for finance, financial reporting is more efficient than ever, and financial reporting analysts can leverage these new technologies to uncover deeper insights.
Planful’s financial performance management platform enables fast-moving and agile teams at companies of all sizes with advanced financial analytics and predictive capabilities that save time and costs, eliminate manual processes, and help finance teams collaborate with the business to identify opportunities to improve business performance.
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