Financial Reporting: Introduction
Financial reporting is the procedure for documenting and reporting a business’s financial and monetary activities over time so that the company’s financial health and performance can be deduced.
This process is similar to the health checkup that individuals do to ascertain the state of their health. A business’s financial health is reflected in the papers, and it is vital to know if the company is profitable both in the present and the future and to realise if it is on an upward trend.
Do Small Businesses Need Financial Reporting?
Owners or managers of small or medium businesses can underestimate the power of financial reporting because they do not have to deal with the big figures. Still, in reality, every stage of business needs financial reporting. A small/medium business that takes financial reporting seriously will be able to manage, monitor, and scale the business easier than one that does not. In fact, when seeking investments from investors, they all love to see the papers and the numbers recorded in the financial records.
Financial Accounting in the U.S.
The U.S. mandates businesses listed as public companies to report their finances in line with the statutory accounting principles known as GAAP as a part of their transparency to investors, banks, creditors, Taxing authorities and other regulatory bodies. Some other relevant financial accounting bodies in the U.S. are the Security and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB).
Key Statements Used in Financial Reporting
In Financial accounting, there are various terms used in presenting financial reports, chiefest of them are these five data listed below:
- Revenues
These are the sum of the money made from selling the products of the business or rendering services as a business or any other source that the company earns from, i.e. commissions, discounts, dividends and interests.
- Expenses
These refer to the cost of producing goods or the cost incurred during the service, such as the cost of acquiring raw materials, the power and energy consumed, logistics, etc.
- Assets
These refer to tangible and intangible properties owned by the business. Buildings, Logistic Trucks and Computers are examples of tangible assets, while intangible assets are properties like patents, trademarks and trade secrets. The amazing fact about assets is that they can be liquidated or sold for others to use.
- Liabilities
These are mainly debts or cash unpaid by the business, i.e. loans, deferred taxes or rents.
- Equity
Equity is fundamentally the difference between the company’s assets and liabilities. The outcome determines the company’s worth.
Types of Financial Statements
A balance sheet reflects the business’s financial position. It is a report of the business’s assets, liabilities, and equity at a particular point in time. It best reflects the company’s health at that instant and reveals whether the business can perform its financial obligations or not. There is always a date on the balance sheet, which is written to reveal the time the record was taken and ascertain that it is up-to-date information in the business.
Note: Records are usually taken at the end of the reporting period.
Assets = Liabilities + Equity
It is renownedly referred to as a ‘profit or loss’ report because it reflects revenue and expenses, which are used to determine profit and loss over time. A business that is not in profit is on the verge of closing; hence, obtaining these figures helps the business know how to respond and make necessary adjustments to make enough profit to keep the company running and scaling.
The net profit of the business is determined by the amount gained or lost by the company over the recorded period. A business can take records monthly, quarterly or annually. However, keeping tabs on the figures on the income statement is effective in determining the profitability of the business and also in observing the trend of sales over different periods.
- Revenue: This is the total income generated by the business. This income could be classed as operating or non-operating revenue. Operating revenue is the income from the direct sales of the company’s products or services. Non-operating revenue is the income made by the business’s passive activities, more like the passive income of the business. Interest on fixed deposits, rentals, and royalties earned from partnerships are all examples of a business’s non-operating revenue.
- Expenses: The total cost of production is reflected in the expenses. This is the total cost of ensuring that a product is developed and distributed. Electricity bills, transportation and logistic fees, employee wages, and interest on loans are all examples of company expenses.
- Statement of Cashflow
Also called the cash flow statement, it is used to report and analyse the amount of cash generated by the business and the direction this money is channelled into, reflecting the changes in the amount of cash during the concerned period. The statement of cash flow helps the business manager see the impact of the cash upon the business since this can be very slippery ground if not correctly observed.
This report helps business owners keep track of shareholder equity activities. As the business carries out activities and dividends are handed to shareholders, the business needs a record of the changes going on in the equity holder’s account. Hence, a statement of shareholder’s equity is responsible for reflecting this account.
Importance of Accurate and Up-To-Date Financial Reporting
- Compliance with Tax Regulation
The most important reason to have a proper financial report is that it’s a statutory requirement for all businesses, especially as they begin to gain sufficient traction. The Internal Revenue Agency uses this information to determine whether the company is paying the required share of taxes to the government.
- Making Informed Decisions for the Business
A detailed financial report helps the management identify the working aspects of the business and the activities that do not make financial sense to the health of the business. It helps the business project its financial future and how much sales might be required to get into that envisioned future.
- Communicates detailed information
All relevant decisions taken to impact the business financially are greatly informed by the numbers on the pages of the financial reports. Suppose investors and key shareholders are going to invest and keep investing in the business. In that case, there has to be a promising future for the business, which is reflected in the business papers.
- Debt management
The ability of the business to manage its debt is mainly dependent on financial reports. These reports can project the business’s revenue and determine whether it will be possible to pay up debts acquired or about to be acquired.
- Mitigates the risk of the business
Any business running without any form of management structure is not considered safe by investors. It will pose a high risk to whoever is willing to invest in it. Ensuring the business has a proper financial report is a great way to reduce its risk.
Final Note on Financial Reporting
Financial reporting is an essential aspect of any business that will take off from any present scale to its dream scale, raking in hundreds or thousands of dollars regularly as revenue. Relevant books and courses on financial management will be of great help to any business owner or business manager.
Leave a Reply