As a small business owner, accurate financial reporting is an essential part of managing, organizing, and understanding your company’s finances. While this concept may seem complicated and overwhelming, we’re here to help define and simplify the process for you. NorthOne’s small business bank accounts also integrate with your existing accounting tools to help make financial reporting a seamless part of your day-to-day management.
This article will cover financial reporting from the ground up including its definition, the financial information it usually includes, the benefits, and the importance behind a standard financial reporting system.
What is Financial Reporting?
Financial reporting is a standard accounting practice that uses financial statements to disclose a company’s financial information and performance over a particular period, usually on an annual or quarterly basis. In simple terms, a financial report is critical for understanding how much money you have, where the money is coming from, and where your money needs to go. Financial reporting is important for management to make informed business decisions based on facts of the company’s financial health. Potential investors and banks will also use your company’s financial reporting to decide if they want to invest or loan you money.
4 Types of Financial Statements
Before we dive into the most common types of financial statements, it’s important to define what a financial statement is and how it works in the grand scheme of a financial report.
A financial statement is a written record that discloses a company’s financial details and business activities. These statements are audited for accuracy by the government, accounting firms, or independent accountants.
The four key types of financial statements found within a financial report include income statements, balance sheets, a statement of retained earnings, and cash flow statements. Learn more about the significance of each statement and the value they provide to financial statement users below.
1. Income Statement
An income statement, also known as the profit and loss statement, summarizes a company’s revenue, expenses, and profits. The income statement essentially shows how much the business earned or lost during a period of time and ultimately determines a company’s net income or “bottom line.”
2. Balance Sheet
A balance sheet delivers a snapshot of a company’s assets, liabilities, and stockholders’ equity at a single point in time.
3. Statement of Retained Earnings
A statement of retained earnings reveals a company’s changes in equity during a standard accounting period.
4. Cash Flow Statement
A cash flow statement (CFS) shows the amount of cash coming in and out of a business. The CFS gives stakeholders an idea of how a business operates and manages cash to pay off debt and fund current expenses and future investments.
Other Financial Documents
Simply put, any financial communication, document, or information that’s shared with the public can be included in a company’s financial report.
Financial reports can include the following:
- Financial statements and related footnotes
- Any financial information featured on a company’s website
- Records surrounding common stock and additional securities
- Quarterly and annual reports to stockholders
- Financial reports issued to the Securities and Exchange Commission (SEC) and other regulatory agencies.
- Press releases covering quarterly earnings reports
Financial Reporting Requirements and Regulations
Financial reports for private and public companies based in the U.S. must follow the Generally Accepted Accounting Principles (GAAP), while most international companies report under the Internal Reporting Financial Standards (IRFS). While both accounting frameworks provide standard rules and guidelines, there are slight differences between the two financial reporting systems.
Although the IFRS is still in development, the general consensus is that it allows international companies to issue short, clean, and reader-friendly financial reports. The U.S. GAAP requires financial reports to be much more thorough and follow a unique set of rules and guidelines.
There are several initiatives to either merge the two frameworks or simply reduce their differences. Despite these distinctions, both systems provide a standard framework to make financial reports accurate and consistent across the board.
Understanding The Importance of Financial Reporting
Without financial reporting, it’s difficult to understand how well a company is performing from a financial standpoint. Not only are financial reports crucial for management or investors to assess a business’s financial stability, but they are required by law for taxes and standard accounting practices. Here are the top reasons financial reporting can benefit your small business:
Make Better Financial Decisions
Analyzing and understanding financial statements is key when a business needs to make an important decision. Financial reports allow management to identify trends, potential roadblocks, and actively track their financial performance in real-time. Staying on top of your financial statements will give you the foundation you need to make quick and sound economic decisions when the time comes.
Financial statements provide business owners and management direct insight into their company’s current assets and liabilities. Also, on how they should effectively manage their company’s outstanding debt moving forward.
Simplify Your Taxes
Financial reports are required by law for tax purposes and the Internal Revenue Service (IRS) uses these reports to evaluate a company’s tax income. Accurate financial reporting mitigates the risk for error and saves an immense amount of time. It relieves the overall burden that comes along with filing your company’s taxes each year.
It’s no secret that accurate financial reporting can improve your company’s financial performance but it also guarantees that your business is compliant with the law and regulations required by government agencies such as the IRS and SEC.
External stakeholders must research a company’s financial position before they decide to officially invest. Financial reporting is a great way to showcase a company’s financial integrity and build trust with potential investors and creditors.