What is financial reporting? And why is it so important for businesses?

Sean Farnell
Sean Farnell

Financial reporting is the basis of modern-day businesses. It has the power and potential to raise the business to the top.

The finance and reporting department is a vital part of a company – it analyses every department’s financial aspects and presents detailed insights to keep a streamlined flow between expenditure and income.

The reports provide essential information that the company can use to enhance the performance of various business areas.

This article from Sean Farnell, Partner at Burgis & Bullock will describe what financial reporting is and why it is essential for businesses.

What is financial reporting?

Financial reporting is defined as the process of providing a precise image of a company’s finances and delivering a comprehensive insight into the economic situation of the business.

The personnel analyse every income and expenditure like revenue, expense, profit, cash flow, capital, and more, to provide insights.

In simple words, a financial report defines how much money the business has, where the revenue is coming from and where the company is spending the profits.

The purpose of financial reporting is to ensure that your business knows day-to-day what its position is. It enables the management to make forecasts and decisions based upon current information.

As part of that process, you need to make sure you are measuring the correct indicators in your business and are doing so on a regular basis – and we would recommend doing this at the least on a monthly basis.

While we will be focusing solely on financial reporting in this blog, there are other non-financial metrics you should be measuring as part of the wider management reporting process.

Read our blog: What is management reporting and how do you get the best results?

There isn’t a ‘one size fits all’ approach for financial reporting, companies will perform their reporting process in different ways. However, there are some fundamentals that are the same for everyone, for example profit/loss accounts and balance sheets.

The specifics will differ from business to business.

Our top tip is to complete financial reports more often than you currently are – don’t just wait until the end of the year! You are then talking about ancient history in terms of figures.

Four types of financial reports

1. Balance Sheet

When we sit down with a client and talk them through their financial reporting process, we explain the balance sheet as a snapshot, a photo of a moment in time.

Your balance sheet is what you can see, what you can touch and what physically exists for your business.

It’s your cash in the bank, it’s your debtors and allows you to see who owes you money. The balance sheet should also include your stock and your creditors.

It’s a photograph that is taken at the end of each period – but that does come with its limitations. It is only a snapshot in time, and you will need to maintain regular monitoring of key financial factors to ensure you are reacting in real-time to issues affecting your business.

2. Income statement or profit/loss account

If your balance sheet is a photo, and you are putting your balance sheet every [time span], then your income statements (or profit/loss account) is the story between your photos.

Businesses can review the path they have taken to their balance sheets by regularly reviewing profit/loss accounts.

It is a key document to show the health of your company’s finances and provides a picture of your revenue and expenditure over a period of time.

The profit and loss accounts allow you to identify trends within your business and provide a outlook for the future of the business.

In putting together your profit/loss accounts, you will need to consider revenue, costs, interest expenses, taxes, net income and more.

Fundamentally, profit/loss accounts track the financial health of a business.

3. Cash flow statement

Turnover is vanity, profit is sanity but cash is reality. That’s a statement I stand by and the cash flow statement is essential to tracking understanding that part of your business.

Ultimately, from the outside perspective it can look like the business is thriving, however, if you don’t have cash in the bank, you will soon go out of business. 

The cash flow statement should understand where the business is today, and report on that, but also forecast ahead and predict cash flow position over the coming weeks and months.

4. Shareholders’ Equity

Shareholder’s equity is the value that is held within the business. This is one aspect of financial reporting which will be applicable only really for larger companies and companies that have been financed by venture capitalist. Most family businesses or SMEs won’t focus on this number unless they are interested in selling up.

Why is financial reporting important?

Financial reports provide a rich amount of data about the business’s situation, and you can use it to increase revenue and profits. Furthermore, the law requires a financial report for taxes and accounting.

Assists in Better Decision Making

Quick and educated business decisions can make a significant difference in the activities. The financial report provides trends, possible problems in the path with a track of financial performances that immensely helps in great decisions. 

Every business has to have financial accounts prepared. The format of those accounts is prescribed by accounting standards. HMRC will expect certain information to be used in a set of accounts.

Tax Simplification

A financial report significantly eases the taxation process and saves a lot of time. Accurate reports reduce the chances of errors, and you will not pay even a single pound of extra tax.

Every business has to have financial accounts prepared. The format of those accounts is prescribed by accounting standards. HMRC will expect certain information to be used in a set of accounts.

Debt Management

Financial reports remind the owners and management about the total assets and debts. The reports will also provide suggestions to correctly manage the debt in the future.

How we can help?

Burgis & Bullock work with a wide range of SME and large businesses to support with their management and financial reports.

We also offer a Virtual Finance Director service which can support with your financial reporting.

Call the office today for expert advice on 0345 177 5500.

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