A timeless maxim holds that good things are easy to destroy but difficult to build. Destruction can arise through passive neglect or active deeds, even if the latter are sometimes intended as benevolent reforms. But whatever form it takes, destruction can be fast (and curiously thrilling for some), while building something good is often laborious, gradual, complex, and tedious.
This maxim is true of many things in life but is perhaps especially true of businesses. A successful business will often have survived a far more precarious “fledgling” stage before gaining market share and profitable traction with consumers. All the more reason, then, to protect and nurture what has been built with such patience and effort. As we’ll show in what follows, keeping up with financial reporting responsibilities is vital for maintaining any business in good health.
What is financial reporting?
A highly abbreviated definition of financial recording is that it’s a form of account-keeping designed to communicate financial information about a business. Let’s expand on that.
Just about every business maintains some form of financial reporting, whether for internal company financial monitoring or external compliance (e.g., legal regulatory obligations, investment-raising, and tax purposes). More typically these days, most businesses maintain both kinds of reporting, with internal reports conforming to the same legal accounting standards required of external reports to ensure optimal accuracy.
The chief difference between the two rests on the purposes they serve. External financial reports are aimed at tax authorities, regulatory agencies, potential lenders, and trading partners and tend to require more rigorous formats and informational details. Internal reports are devised to assist a firm’s senior management in crafting informed decisions and are usually more tailored to the particular business objectives under consideration.
For most businesses, the challenge resides in producing accurate financial reporting in timely and efficient ways. Next, let’s look at the fundamental elements of financial reporting – and how the process can be simplified.
Three core components of financial reporting
From the paragraphs above, it should be becoming clear that financial reporting isn’t an “event” occurring, say, at the end of a financial year; it’s a continuing process, often produced on a monthly or quarterly basis. In some respects, like a fitness tracker, the aim is to yield important insights into a company’s performance, financial state of health, and operations.
Here are three core components of financial reporting:
1. Balance sheet
A balance sheet must clearly show a business’s financial status at a specific point. In other words, it provides a clear snapshot of a firm’s assets (what it owns), its liabilities (what it owes), and the value of the owner’s investment (equity). While large corporations often employ dedicated (and expensive) professional finance and reporting teams, smaller businesses today have recourse to a far more affordable (highly efficient) option: providers of cutting-edge subscription services to advanced cloud accounting software.
As Forbes recently put it, this technology, which automates the ‘pre-digital era’ tedium of manual data entry and document creation, “can help reduce errors, add a layer of visibility to key executives, add scale to the process and enable companies to use a best-of-breed approach developed by Fortune 500 companies.”
2. Income statement
Income statements show the condition of a business’s finances – its revenues and expenditures (including tax and interest expenses) – over a period rather than at a specific moment. Sometimes referred to as “profit/loss accounts,” these statements show trends and outlooks for the company’s future.
3. Cash flow statement
Putting it bluntly, an accurate picture of a firm’s cash flow is a more crucial indicator of its profitability than its turnover. If there’s too little cash in the firm’s bank account, the risk of going out of business draws perilously close. Cash flow statements show and track a firm’s (or a part of a firm’s) cash status at any one time but can also be used to forecast that status in the weeks or months ahead.
Why financial reporting is so important for businesses today
When stock values in major companies tracked by indices like the Dow or S&P 500 fluctuate, the causes are usually intricate and many; but shifts in investor confidence are fundamental amongst them. There may be little that smaller firms can do to manage the disruptive impact of major geopolitical events or natural crises on supply chains or consumer demand but maintaining a high reputation through demonstrably sound financial management is undoubtedly within their reach.
Companies that can show that they consistently meet high legal and regulatory standards for financial reporting not only create favorable impressions amongst consumers and clients but amongst potential investors, too. Any business wishing to seize a market opportunity to move forward swiftly or to expand can experience a cash flow problem. And at moments like this, investor confidence is critical to further success.
Before any hard-headed investor is willing to part with any funds to help a business grow, they’ll always want to study that firm’s financial reports. Poorly kept, out-of-date, or otherwise incomplete records, frankly, will put them off and send them elsewhere. And existing investors will want to see regular financial updates too.
In conclusion, having accurate, efficient financial reporting systems in place is a necessity for any aspiring business today, not a luxury.
