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What is financial reporting?

What is financial reporting?

Financial reporting is the process of recording your company's core business processes over a set period of time and preparing financial statements accordingly. The primary objective of financial reporting is to provide information about a company's financial position. Some types of financial reports are required by law.

A financial report might be generated on an annual basis, though quarterly reports are also common. And by tapping into technology, modern businesses are able to view real-time data and generate up-to-the-minute reports upon request, giving you total visibility into your company's financial performance.

These financial statements provide detailed insight into your company's financial health. Therefore, they are as important to your internal leadership as they are to your external stakeholders.

Armed with this information, you are poised to make better business decisions and continue to hone your strategy for the road ahead. That's why SMBs use financial reports to drive future growth and eliminate areas of inefficiency.

Types of financial reports

According to Harvard Business Review, the financial reporting process "remains murky" for many businesses. But without accurate financial reports, your business will be in the dark regarding things like revenue, cash flow, and other vital pieces of financial data.

You can avoid this situation by regularly preparing the four main types of financial statements.

The following is a description of each, along with tips for how to read a financial report to gain insight into your company's financial stability.

Balance sheet

A balance sheet is designed to provide a snapshot of your company's financial health at a specific point in time. Balance sheets summarize a company's assets, liabilities, and shareholder equity. Thus, a balance sheet provides an overview of your company's financial position (including financial obligations) during a certain reporting period.

If you look at a balance sheet, the top number is typically the date that the snapshot was taken. This is often the end of the reporting period, but balance sheets can be prepared for essentially any date. Assets and liabilities will be listed separately. Assets are customarily listed either at the top of the balance sheet or in the left-hand column. Liabilities will be listed at the bottom or the right-hand column.

Income statement

Another key financial report is your income statement, sometimes referred to as a "profit and loss statement." It's easy to confuse your balance sheet with your income statement, but there are several key differences.

First, income statements cover a period of time, not just a snapshot. Income statements are often used to prepare quarterly and annual reports to perform financial analysis over time.

Second, income statements record different information. Balance sheets include assets, liabilities, and shareholder equity. An income statement reports revenue and expenses.

Third, the two types of financial statements are used for different purposes. Your company's balance sheet can help you verify that you can meet your financial obligations. Your income statement will show you your company's profits to verify that you're meeting your benchmarks and thriving.

Potential investors might even use your income statement to determine whether your company's performance makes you a worthy company to invest in.

Cash flow statement (CFS)

No company can get far without regularly preparing cash flow statements.

A CFS shows how the cash flows both into and out of your company. Keep in mind that this is not the same as revenue or profit. Instead, a statement of cash flows will indicate your company's ability to generate and maintain cash, which in turn reveals your ability to meet your financial obligations.

To learn how to read a cash flow statement, you'll need to understand three distinct sections:

  • Operating activities: Cash gained or used during your company's operations
  • Investing activities: Cash gained or used through investments
  • Financing activities: Cash gained from outside funding or paid to company shareholders

It's possible for your cash flow statement to reflect negative cash flow in one of these categories even when you're not experiencing negative cash flow company-wide. For example, a company might rely on cash flow from financing activities even while operating revenue is down.

It's also important to note that it's possible to have negative cash flow while still achieving strong revenue. For instance, a customer might make a purchase, but if your bills are due before they pay their invoice you may struggle to have the funds to cover your operating expenses.

That's why your company's financial performance demands that you evaluate both your revenue and your cash flow for a better picture of your financial health.

Statement of shareholder equity

Another critical financial statement is your statement of changes in shareholder equity. Your statement of shareholder equity tracks total equity over time and reflects your company's retained earnings. It is keyed to a balance sheet from the same reporting period. The ending balance on each financial statement must be identical.

Every company will prepare these financial statements in unique ways. Nevertheless, there are some common components, such as:

  • Beginning equity: The equity at the end of the preceding reporting period
  • Net income: Income earned during the current reporting period
  • Dividends: Any money paid out to shareholders
  • Comprehensive income: Period-over-period change in income (positive or negative)

Potential investors will likewise use these financial statements to evaluate the future performance of publicly traded companies.

However, any business can use these financial statements to monitor its own performance or track progress toward benchmarks and KPIs.

Financial report example

To understand these financial statements better, you might look at a financial report sample.

Consider the following balance sheet from Company ABC. On August 1, 2023, the company's balance sheet reads as follows:

Assets include:

  • Cash and cash equivalents ($50,000)
  • Accounts receivable ($75,000)
  • Inventory ($125,000)
  • Prepaid expenses ($15,000)
  • Property ($350,000)
  • Investments ($10,000)

Thus, Company ABC's total assets come to $630,000.

Liabilities include:

  • Accounts payable ($20,000)
  • Wages ($15,000)
  • Dividends ($15,000)
  • Long-term debt ($200,000)

Thus, Company ABC's total liabilities come to $250,000. The company's ratio of assets/liabilities therefore comes to 0.39.

But you don't have to prepare your financial statements from scratch. BILL makes it easy by offering a financial reporting package. This package includes a downloadable financial report template for each of the following types of financial statements:

  • Balance sheet
  • Income statement
  • Cash flow statement

These simple financial reporting tools will standardize your reporting process to save you time and ensure accurate financial reporting across your organization.

Additionally, these templates are fully customizable, letting you adapt each one to your unique business or industry.

What does financial reporting include?

Financial reporting involves the integration of data across your entire organization to provide a comprehensive picture of your company's financial performance. Financial reporting typically includes the following:

  • External financial statements, such as income statement, balance sheet, statement of cash flows, etc.
  • Financial statements notes
  • Communications about earnings or financial information
  • Quarterly and annual reports to stockholders and stakeholders
  • Financial reports to government bodies such as the Securities and Exchange Commission (SEC)
  • Documentation regarding stock issuance

All forms of information will be relevant to the financial reporting process, and communications about retained earnings and other financial data can include things like emails, press releases, and other sources of a company's financial data.

Importance of financial reporting

Why is financial reporting important?

For startups and growing businesses, a company's financial reporting processes will play a vital role in devising (and revising) company strategy. Current financial data will prove valuable in projecting future growth.

But financial reports are important for companies of any size or industry. A company financial report can be used to do the following:

  • Demonstrate financial viability when securing external financing
  • Ensure compliance with existing tax regulations
  • Communicate your financial position to future investors
  • Evaluate your business operations over a long period of time
  • Analyze business data
  • Monitor cash flow
  • Distribute information to company shareholders
  • Mitigate risk arising from financial reporting errors
  • Gain better internal control over financial reporting

By analyzing financial statements, you'll be better positioned to make strategic decisions about your company and communicate your company's performance to current shareholders and future investors.

Who uses financial reports?

A firm's financial statements might be prepared by the internal accounting team, though company management is ultimately responsible for signing off on them and ensuring their accuracy.

Financial statements are used internally as well as externally. Examples of internal uses of financial reports include:

  • Management using financial documents to guide decisions and strategy
  • Employees using these statements and other financial documents to prepare budgets
  • Owners monitoring the decisions of management

Externally, a financial statement might be used by:

  • Potential investors looking to evaluate a company's financial performance
  • Financial institutions evaluating a company for a business loan
  • Current shareholders monitoring company performance
  • Regulatory agencies monitoring financial information
  • Business partners evaluating a company for potential supplier contracts
  • Competitors seeking to evaluate a company's business performance

As you can see, accurate reporting is vital. Your financial reports are used by not only your company but also the customers and institutions that have a stake in your success.

Who regulates financial reporting?

Every business is subject to several financial regulatory institutions. These include:

  • The Financial Accounting Standards Board (FASB)
  • Securities and Exchange Commission (SEC)
  • Federal Reserve Board
  • National Association of Insurance Commissioners
  • Financial Industry Regulatory Authority (FINRA)
  • Internal Revenue Service (IRS)

Collectively, these agencies hold business leaders accountable for sound financial management and integrity regarding their communications with shareholders and regulatory bodies.

Financial reporting requirements

Both public and private companies must adhere to specific financial reporting criteria. These include such requirements as:

  • Preparing financial statements at least once per year using a standard system to compare yearly data
  • Preparing reports according to Generally Accepted Accounting Principles (GAAP)
  • Preparing reports according to International Financial Reporting Standards (IFRS)
  • Conforming to all existing tax regulations

Additionally, the U.S. Securities and Exchange Commission (SEC) requires that public companies file reports that include:

  • Quarterly 10-Q reports
  • Annual 10-K reports
  • 8-K reports for significant events

Failing to abide by these financial reporting requirements can result in fines, penalties, or even legal action. At the very least, failure to abide by these financial reporting standards can leave you in the dark about your company's performance or cash flow.

Simplify financial reporting with BILL

Do you want to make more informed decisions about your business? Then it's time to get serious about financial reporting. Good financial reporting will help you keep your finger on the pulse of your core business activities and plan for future growth.

BILL can help. Our financial reporting tools conform to Generally Accepted Accounting Principles as well as International Financial Reporting Standards. More importantly, our tools make it easy to perform financial reporting and analysis at every stage of your entrepreneurial journey.

Start by downloading our free financial statement templates, then learn more about how BILL can provide a detailed view of your company's most important data as well as end-to-end visibility of your entire business ecosystem. Take your financial reporting to the next level with BILL.

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