What are financial reports?
For effective management and planning of the company’s activities, as well as when attracting investments, all financial indicators must be properly structured and monitored regularly. This can be done using financial reporting.
Financial statements or reports are a combination of three main reports on the state of the business. They include data on cash flows, income and expenses, as well as the current balances. All three components provide an opportunity to see a complete picture of the current financial state of the business.
Financial reports have internal and external users. Internal are employees of the organization: accountant, manager, CEO, etc. They rely on reports to improve the financial results of the company. External users are creditors, investors, counterparties, shareholders, tax inspectors, etc. They monitor the financial position of the company, assess its reliability and solvency, fulfillment of obligations, and so on.
Why is financial reporting so important?
Startup owners often underestimate the role of financial reporting. They compose it not for themselves, but for the IRS and just to be able to file taxes. However, one needs to understand, delve into, analyze the activities of the company. Companies that have been on the market for a long time understand the importance of reporting. Young companies need time to learn and understand the significance of financial reporting.
Why is it so important? The answer to this question lies in the definition of financial reporting: it is a set of reports that speak about the state and performance of the company at the moment. Without reliable information about the position of the company, which is contained in the financial statements, it is impossible to make the right decisions. You would literally do guesswork.
Financial reporting is the basis for making management decisions. In order for the management to understand in which direction it is better to develop the organization and how to adjust the current strategy, it must have up-to-date and reliable information about the results of its activities and financial position. The financial reporting also allows measuring the business’s ability to repay loans, pay incoming bills and order new products for sale. It shows the main sources of income and how it is allocated within the business.
Financial statements will show whether the business is profitable or unprofitable. Are there any major problems such as a constant decline in consumer demand for manufactured products? Viewing the financial reporting will show the general picture of the financial state of the business and whether there are any signals for possible problems in the future. It is often used by banks or investment structures as the main document for analysis.
Preparation of financial reporting
In order for financial statements to be really useful and help managers in managing the company and investors in making the right decisions, they must be of high quality and reflect the real state of a business. In public companies, the accuracy is confirmed by the auditor. In other companies, reliability depends on how responsibly it is compiled, although every business can also be checked by the IRS and other authorities.
Typically, a bookkeeper, an accountant, or business owner systematically records, sorts, and summarizes thousands of documents (sales records, invoices, and bills) that represent business transactions. These deals include the sale of goods, the distribution of the payroll, the purchase of inventories, and much more. After that, these facts are brought together, classified, summarized, and presented in the form of financial reporting of the enterprise.
Financial reporting is prepared, at the discretion of the company, quarterly, twice a year, or once a year. In most cases, financial statements are compiled at the end of the year for key employees of the company and its shareholders. Most of the reports are also usually compiled for one year (fiscal year) because this is what the businesses are required to do for tax purposes. Reports that are not submitted at the end of the fiscal year are known as interim reports.
If you need to provide financial statements to a bank or investors, it is worth developing reports in an accounting language understandable for interested parties. Since financial reports can be requested by tax authorities, it is necessary to draw up them in accordance with all the rules and generally accepted accounting norms.
Also, note that a business might need to have reports ready within a short period of time. For this reason, it is also very important to keep track of the records in the accounting department and their timely addition to the books. You will be able to quickly prepare financial statements and submit them to the users with the help of accounting software.