Whether you're the sole employee of your small business or you run a Fortune 500 company, financial reporting is an essential practice your business needs to carry out to achieve its financial vision. As an entrepreneur, you already have a variety of tools under your belt, and financial reporting is one of the most important.

This critical business function is an accounting process for communicating all financial information about an organization so stakeholders can access the financial results.

But, what is the objective of financial reporting?

Its objective is to provide information about a company’s financial performance and position that various parties can then use to make informed decisions about the business.

Let’s dive a bit deeper into the details of financial reporting so you can better understand how to use this data to maximize profits and business opportunities, advancing your already successful business to the next level!

There are two types of financial reporting: external and internal.

External reporting is crucial for company outsiders to assess and understand your organization’s financial position. These outsiders include:

• CPAs
• Regulatory bodies
• Investors and potential investors
• Lenders
• Stockholders
• Tax authorities

These professionals may use your financial reporting to project future performance, as well as to determine the overall health of your business. They may also use it to confirm compliance with various regulatory standards.

Internal reporting, on the other hand, is critically important for a company’s senior management team, as this information allows key leaders to make informed business decisions based on facts, not feelings. Internal reporting may be robust and should be tailored towards the company's specific needs and objectives.

Without this financial data, it would be difficult to appreciate the organization’s current position and what adjustments would be required to improve performance. Without it, you wouldn’t see signs of trouble ahead or be able to mitigate risks.

Further, financial reporting provides an assessment of how well the financial management team is performing over a specific period of time. If management or business strategy needs improvements, it will show in the data, and the company can adjust.

In short, appropriate financial reporting is key to bringing your company’s vision to life.

Financial reporting includes many types of financial statements of a company, such as:

• Annual report: yearly report to shareholders documenting financing activities and financial health
• Balance sheet: a snapshot of a business’s financial health, distinguishing current and noncurrent assets and liabilities
• Cash flow statement: an overview of how a business obtained and spent cash and cash equivalents
• Financial disclosures: information to explain financial statements to readers
• Income statement (profit and loss statement): a summary of the expenses, profit, and sales for a fiscal period
• MD&A: analysis detailing performance for the previous three years and highlighting the most recent year’s income and sales
• Retained earnings statement: itemizes all changes in retained earnings
• Statement of shareholders’ equity: reports changes in shareholders’ accounts
• SEC filings: Form 10-Q and Form 10-K, and other governmental financial reports

The reporting will also include consolidated financial statements. These are statements with multiple divisions, such as a parent company and all its subsidiaries. For a public company, the reports may include press releases containing financial information about the company.

If you decide to outsource the financial reporting process to a third party, the company you hire may offer additional financial statements based on their pricing structure.

Of course, financial reporting isn’t perfect and still falls short in a few areas, but its advantages significantly outweigh the pitfalls. Let’s review some of its most significant benefits.

Identifying Trends

Internal financial reporting and analysis help companies identify business trends. This is important because the business can maximize these trends, capitalizing on opportunities, and limiting risks from arising challenges.

Monitoring Financial Performance

The easiest and best way to understand a company's financial performance is through reporting. Businesses can track their cash flows and assess current assets, both of which are vital to success.

Even better, having a continuous planning system will provide real-time insights into the company's financial health for all to see at any given time.

Helping With Business Decision-Making, Planning, and Forecasting

Although decision-making skills are crucial for senior management and business owners, making informed decisions is easier when you have applicable analytics in hand.

Financial reporting helps manage everything, allowing key leaders to make strategic decisions through meaningful metric analysis, shifting the business by leveraging its assets and liabilities appropriately.

Optimizing Operations

If you don’t measure it, it’s difficult to manage it. As a savvy entrepreneur, your business is likely taking off. But through optimizing operations, you can reach financial levels you never dreamed of.

Regular internal financial reporting helps businesses become more efficient through tracking KPIs and essential metrics. For example, analyzing accounts receivable KPIs, like the days to collect, can help managers understand the effectiveness of the billing and collection team.

If you need proof that financial reporting optimizes operations, research some of the fastest-growing companies to see how they used financial data to rapidly expand and secure venture capital funding.

The requirements for financial reporting are frequently changing, making financial reporting more accurate and effective. However, several standard setters play a key role in setting regulations. They are:

• Financial Accounting Standards Board (FASB)
• Generally Accepted Accounting Principles (GAAP)
• International Financial Reporting Standards (IFRS)
• Securities and Exchange Commission (SEC)

Small and private companies have far fewer external reporting requirements than publicly held companies. Although private companies don’t need to make their financial data available to the general public, they still need to file their IRS tax statements.

Lenders will also often use financial reports when deciding when to lend money to a business. To raise capital, you need to ensure your financial statements are current and correct, accurate and complete.

Although vital to your business, appropriate financial reporting can be difficult to establish when you don’t have a full-fledged finance department. With your business acumen, you may have already created certain financial reporting components yourself. But imagine what you could do with clear insights from a financial expert who created a comprehensive reporting package, customized for you. You could make your dreams a reality.

If you would like to access the benefits of comprehensive financial reporting, contact us today to see how we can help. Our team at The William Stanley CFO Group is here to provide the reporting, support, and guidance necessary to take your business to the next level!