What Is Financial Reporting and Why Is It Important to the Business?

What Is Financial Reporting and Why Is It Important to the Business?

For many businesses, the growth and expansion phase is an exciting time. It creates new opportunities, brings in new customers, and generates more revenue and higher profits.

However, if your team lacks crucial financial reporting and analysis capabilities, making informed decisions to manage and grow your business can be challenging.

So, what is financial reporting, exactly? Financial reporting is one of the most critical business processes that accounting, finance, and the business must understand and appreciate.

Financial reporting is the comprehensive review of monthly, quarterly, or yearly financial data to drive better business performance and results. A timely and accurate financial reporting process helps you understand your company’s performance and identify opportunities to make the right business decisions for future growth.

Why Is Financial Reporting Important for Everyone?

The main goal of finance reporting is to help finance, business partners, department leaders, and stakeholders make strategic decisions about a company’s operational activities, growth, and future profitability based on its overall financial health and stability.

At a minimum, quarterly financial reports and annual reports are required for public companies, while internal measurement is typically performed monthly.

A periodic valuation of a company’s financial performance and stability helps to accomplish the following:

Improve Business Agility and Partnership

Accurately tracking and analyzing a business’s finances improves agility by giving the business and finance teams direct insights into the company’s performance. Financial statements include detailed information on an organization’s revenues, expenses, profits, capital, and cash flow—these are used to track historical performance, identify key areas of spending, and create forecasts.

Also, these financial statements are typically the starting point for assessing how finance teams can communicate with their business partners. Finance communication and alignment and the ability to turn complexity into clear statements are critical to improving the role of Finance as a business partner. Financial statements can translate into business understanding, connection, and action. The goal of a finance team is uniting the business, not just reporting the numbers.

The visibility and analysis provided by financial statements make it easier to maintain short-term liquidity, manage debt more effectively, and plan resources and budget allocation more efficiently. It also helps organizations identify trends, mitigate potential risks, avoid obstacles, stay ahead of the competition, and take advantage of any opportunities for growth and investment.

Maintain Transparency

Open and complete access to a company’s financial data helps build trust and solidify relationships with the business. This is because departments, teams, and business leaders rely on current financial data to make decisions, plan budgets, and track results.

Externally, financial reports provide insight for external stakeholders to understand your company’s direction and performance. Transparency is vital in all company areas, so finance teams should set the tone by proactively communicating with their key external stakeholders.

Ensure Compliance and Completeness

Compliance and completeness are vital to accounting teams and should also be a core pillar for finance teams, the business, and executives. Compliance with all core accounting, investor, and industry guidelines and rules is vital for the trust of those financial statements.

Each document you use to evaluate financial performance must comply with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). Several financial regulatory institutions, such as The Financial Accounting Standards Board (FASB), review this.

This also reinforces the importance of finance and accounting teams being deeply familiar with new changes, updates, or rules and regulations, which are vital to ensuring compliance and completeness.

In addition to the above rules and regulations, financial reports must also comply with tax regulations and financial reporting criteria established by the Internal Revenue Service (IRS).

In the case of publicly traded companies, quarterly and annual results must also be filed and published with the Securities and Exchange Commission (SEC), which regulates and monitors the securities market for the government.

Cashflow Optimization & Inspection

Cash is king, and it is one of the most important key performance indicators (KPIs) upon which the financial health of a business is measured.

Financial reporting allows finance teams and the business to track and analyze cash inflows and outflows to help identify current and future cash flow risks. This ensures the organization has sufficient cash flow 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.

Key Types of Financial Reports

Financial statements and reports give the business a picture of an organization’s financial position. In general, there are four types of financial statements:

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 because they lay out the 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

This financial statement, also known as a P&L report or Income Statement, shows your company’s net income and expenses and profits or losses during a specified period. It gives you a clear picture of your company’s profitability.

Creditors and investors often combine financial information from the P&L together with insights from the other three financial statements to determine whether the business is worth investing in or providing financial assistance.

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 is based on a company’s operating, investing, and financing activities.

This statement gives the business insights into the liquidity and solvency of a firm. It lets them know how a 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

This financial statement reports on a company’s changes in retained earnings after dividends are released to stockholders. It allows stakeholders to see what factors caused a change in owner’s equity during the accounting period.

The Statement of Changes in Equity is also important because it includes transactions not recorded in a company’s income statement and balance sheet, such as equity withdrawal and dividend payments.

As such, it helps shareholders and investors make more informed investment decisions.

Revamp Your Financial Reporting Through Predictive Analysis

Successfully growing a business requires looking ahead, being agile, and proactively making adjustments with better decisions.

Leveraging technology that makes financial reporting a team sport, where Finance partners with the business, is what helps drive financial and business transformation.

Planful’s financial reporting software helps finance teams unite and align the business on corporate and financial goals.

Our platform enables fast-moving, high-growth, and agile teams with advanced real-time analytics and predictive accounting capabilities that save time and costs, eliminate manual processes, and help proactively identify opportunities to improve business operations, performance, and collaboration.

Sign up for a live demo of our cloud FP&A platform.

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