You probably already know that financial reporting is required for filing business taxes in most countries. But did you know that the importance of precise financial reporting extends far beyond simply filing taxes?
When you really engage with the process, reporting and analyzing your business’s finances can help you transform your company for the better. Here’s a closer look at why accurate financial reporting and analysis are essential.
What Exactly Is Financial Reporting and Analysis?
In a nutshell, financial reporting and analysis is the tracking of a business’s financial key performance indicators (KPIs) in order to inform strategic decisions. The exact KPIs can vary based on the business, but they often include cash flow, expenses, profits, and revenue.
Types of Financial Reporting
Many businesses rely on specific types of financial reporting to inform key financial decisions. A few common types of reporting include:
- Cash Flow Statement: Shows incoming cash and where it is spent
- Income Statement/Profit and Loss Statement: Indicates revenue, expenses, gains, and losses over a set period of time
- Balance Sheet: Gives a snapshot of a business’s financial health
- Statement of Retained Earnings: Shows company earnings after it pays dividends to shareholders
- Statement of Shareholder Equity: Demonstrates to shareholders how much their equity fluctuates and why
- Environmental, Social, and Governance (ESG) Reports: Indicates steps the company has taken to reduce its impact on the environment, efforts toward diversity and fair labor practices, regulatory compliance, and political activity
Once your company has generated these reports, you’ll have a clear picture of your company’s finances. From there, you can identify problems and develop strategies for growth.
Why Is Accurate Financial Reporting and Analysis Key?
The importance of accurate financial reporting and analysis extends beyond tax purposes. While accurately reporting and analyzing your finances is necessary for taxes, these processes offer a whole host of other benefits to your company as well.
Tracking Finances in Real Time
Regular reporting lets you keep up with your company finances. This allows you to quickly make changes when necessary.
Identifying and Managing Liabilities
Your company’s liabilities should be factored into any decision you make. Regular reporting ensures you understand your liabilities at any given point.
Identifying Trends
Tracking trends helps you see how different strategies help — or hurt — your business. This enables you to adjust strategies as needed.
Managing Debt
Regular reporting can help you track your debt. When you report regularly, you can also manage your liquidity more effectively.
Ensuring Regulatory Compliance
By keeping up with your finances, you can identify and quickly remedy any compliance issues. The more accurate your financial analysis is, the better insight it will offer into these issues.
Improving Communication
Clear financial reporting helps keep everyone on your team informed and on the same page. When it comes to running a business, transparency is key to success.
