Financial Reporting

Overview: Financial Reporting and Analysis

While people may know that a financial reporting and analysis process is important, maybe people understand its undeveloped power and potential. Financial analysis is one of the strong bases of modern businesses. Financial reporting and analysis provide insight analysis of the business that helps them to remain manageable while smooth-running their profits or expenses.

With the help of online data analysis, utilising financial data allows one to share essential information internally and externally but also provide leverage metrics or insight to improve the particular area that empowers the business to run.

This article helps to understand the potential of financial analysis and reporting. Let’s start with a definition of financial reporting.

What Is Financial Reporting and Analysis?

Financial reporting and analysis mean recording and representing the financial data of the company. Financial reports consider a company’s financial position and performance in a particular period. Financial reports are important to understand future growth and help make investment and financial decisions. Many investors, shareholders, financiers, government, and management depend on financial reports for decision-making.

It represents financial transactions in the books of accounts. Financial reports provide the company’s insight for investors and creditors. Financial statements show the company’s financial health, including liquidity, profitability, and solvency and operating efficiency. 

When it comes to financial requirements & regulations, there are mainly two frameworks — GAAP and IFRS. GAAP lists reporting guidelines for US-based public and private companies. The IRFS, on other hand, has established a universally accepted standard for formulating such reports—followed by international companies.

Financial analysis is used to evaluate the company’s financial information via metrics known as key performance indicators or KPIs. Metrics like these are used throughout companies to evaluate & improve performance, but in financial accounting, they determine a company’s overall financial health. Using financial reporting and analysis software equipped with business intelligence & data analysis tools, financial professionals can harvest actionable insights from a company’s financial statements in time to use them effectively.

Benefits of Financial Reporting and Analysis

Does the company want to optimize their workflow to boost performance in the marketplace? Reduce their debt burden, improve their credit rating, and strong their cash flow. 

But what about accelerating strategically valuable business decisions while enhancing compliance?

The practical and efficient financial reporting and accounting, supported by data management and analysis tools, can make it happen.

Improved debt management

As everyone know, debt can hamper the growth of any company, regardless of sector. However, various types of financial reporting and analysis regarding tools or software exist. Almost all solutions will help a company track their current assets divided by the current liabilities on its balance sheet to help determine its liquidity and solvency and control its debts.

Real-time tracking

The company can make an accurate and informed decision while maintaining the financial statements at all times with the help of tracking real-time insights. With real-time tracking of visibility and analysis, a company can be one step ahead of its competitors and grasp advantage of opportunities for potential growth and investment.

Optimizing Financial Performance and Compliance

The insights collect from analysing the financial data have immediate worth for strategic designing and decision-making. However, understanding those insights also help to develop long-term value by helping to determine the right set of circumstances to filter the operation and enhance efficiency, accuracy, and speed over time.

Cash Flow Management

An organization’s cash flow can be large or small, but it is essential to its continued financial health. With a combination of detailed metrics and performance indicators (KPIs), it’s possible to see cash flow relative to expected profits and liabilities, keeping the cash flow safe and smooth in the process. According to a study held in 2020 by the International Labour Organization (ILO), for businesses trying to cope with the pandemic (Covid-19), the biggest threat to business operations and liquidity was cash flow management. 

Reducing Risk Exposure

For the company’s financial position and health, it’s essential to mitigate the risk to optimize the process and provide quality data. Financial reporting and analysis can help the company to mitigate the risk with the help of various factors:- 

1. Identifying and correcting delays, inefficiencies, and errors in the financial processes before they become crises. However, with the help of artificial intelligence (AI) and process automation, iterative improvements can filter the processes to enhance performance and accuracy.
2. With the help of a predictive analytics tool, identify the changes in the market, supply chain disruptions, etc., and develop possibilities accordingly.
3. Leverage data-driven insights to make strategically sound business decisions, investments, and business process management initiatives organization-wide.
4. Improving data security and spend management help to mitigate the risk of financial fraud.

Improving Supplier Relationship Management

Paying all bills on time or before the due date is good for the company to get a better relationship with their vendors or suppliers. But paying before the due date is not always the right decision for cash flow management^[1]. It only helps on get an extra discount from the vendors. Most of the time, it might be good to pay the bills as close to the due date as possible to maintain liquidity or even request late payment if a company have a strong relationship with their supplier.

Why Is Financial Reporting and Analysis Important?

Financial reporting and analysis are very important for businesses to know their financial health. With the help of financial reports, investors or third parties can quickly evaluate and analyse the company’s position and liquidity.

So, the following are the importance of financial reporting:-

Monitors income and expenses

Monitoring income and expenses is another essential process that financial reporting help. Monitoring financial statement is necessary for effective debt management and allocation of budget and help into provides insight into critical areas of expenses. Tracking income and expenses ensures companies regularly keep an eye on debts to remain transparent in competitive markets. Therefore, financial reporting and analysis provides methods to track current liabilities and assets. Accurate financial reports are also necessary to evaluate important metrics, including debt-to-asset ratios, which investors or others use to measure how effectively and frequently companies pay down debt and generate revenue.

Ensures compliance

Financial reporting encompasses companies’ specific processes to comply with mandatory accounting regulations. Each document people use to evaluate financial activities comes under the review of several financial regulatory institutions. This makes accurate documentation crucial to ensure all financial reports comply with tax regulations and financial reporting criteria. 

Communicates essential data

Key shareholders, managers, investors and professionals depend on up-to-date financial information to make decisions, plan budgets and monitor performance. Open communication and transparency are essential to support funding, investment opportunities and financial oversight. Many investors and creditors depend on the details companies put in their financial reports to evaluate profitability, risks and future returns.

Provide the financial data; creating an investor relations dashboard is great. With a different benchmark, including return on asset ratio, return on equity ratio, and debt-equity ratio, the investor’s dashboard provides a complete overview of the company’s financial performance tracked over a while. 

Supports financial analysis and decision-making

Financial reporting and analysis is crucial for performing analysis that supports company decisions. Financial statements improve accountability and help in the analysis of critical financial data. The income statement and balance sheet offer real-time details that help to track past performance, pinpoint key areas of spending and prepare forecasts more precisely. Accurate data models and detailed financial analysis and reporting help companies evaluate current activities and make decisions about future growth.

For building strategies and ensuring profitability

Financial analysis and reporting are essential to building sound strategies and keeping the business profitable. According to the research, people accept that the financial data included in the financial statements helps identify effective methods to minimize costs and eliminate potential losses to maintain profitability.

Types of Financial Reporting and Analysis

Balance sheet

A balance sheet includes the total assets, liabilities and shareholders’ equity. The balance sheet signifies total assets minus equity and liabilities. Generally, companies follow balance sheets quarterly and may include data from balance sheets while preparing yearly financial reports. It also provides a real-time evaluation of current asset liquidity and debt coverage. The following are the elements included in the balance sheet:-

• Liquid assets include cash and cash equivalent, certificates of deposit, short-term securities and treasury bills.
• Current assets include accounts receivable (AR), inventory, and prepaid expenses.
• Current liabilities include short-term debt, accounts payable, creditors, payable wages and dividends and tax expenses.
• Shareholder and owner equity include retained earnings, receivable dividends, capital gains and stock.

Income statement

Some companies track quarterly or monthly income statements and use these reports to monitor and evaluate financial processes all over the year. The income statement help to determine the performance of revenue or sales, net income, operating expenses and earnings per share if companies are listed on a stock exchange. The income statement is a statement for reporting profits and losses. Income statements refer to the profit & loss statement or P&L statement. There are different elements are included in this statement:

• Operating revenue, which comes after selling products or services.
• Net and gross profit, including total sales revenue and after subtracting the cost of goods sold.
• Earnings before interests, taxes, depreciations, and amortizations (EBITDA) includes selling, general and administrative costs (SG&A) and other expenses.
• Operating profit gets after subtracting the interest, depreciation and amortization.
• Calculate Net profit, subtracting the taxes from the operating expenses.

Cash Flow Statement

The cash flow statement is essential for calculating the efficiency with which companies generate cash to pay down debts. Statement of cash flow also encloses how well companies fund operations and investments, showing the ongoing activities that generate revenue to support expenses. Accurate cash flow statements are important for understanding the capability of standard practices, spending activities and revenue generation.

The cash flow statement also provides investors with the company’s valuable insight into whether a company have a higher investment risk. On the other hand, the balance sheet and income statement, which require more calculations to record financial data, the cash flow statement includes three key activities:

• Operating activities include AR and AP, inventories, wages, income tax and cash receipts.
• Investing activities include generating and using investment earnings, asset sales, asset purchased, Raising debt and payments from acquisitions or mergers.
• Financing activities include stock repurchases, payable dividends, debt repayments and issuance, cash from investors and cash payments to shareholders.

Statement of shareholder equity

Shareholders’ equity appears on the balance sheet. However, more giant corporations may show these activities on separate statements. The statement of shareholder equity serves this purpose and includes the amounts key stockholder’s and owners invest in a company. These investments, such as company stocks and securities, which pay dividends at specific periods. Additionally, other items on a shareholder equity statement that companies commonly review include:

• Common and preferred stock sales and repurchases.
• Purchased treasury stock, minus reissued treasuries during the reporting period.
• Retained earnings after subtracting dividends and losses.
• Accumulated income, including incomes from unrealized capital gains minus capital losses.

Purpose of Financial Reporting and Analysis

Financial reports represent the company’s performance in terms of financial data. The following are the purpose of financial reporting and analysis:- 

• Time-to-time Record Maintenance: In the financial statement, all the company’s financial transactions in a particular period are recorded.
• Analyzing the Financial Ratio: With financial reports’ help, financial ratios are easy to evaluate and analyse.
• Tax: Internal Revenue Service (IRS) formulated financial accounts and reports. The reports help the company in filing tax returns.
• Reveal Company’s financial position: Many investors, shareholders, financiers, government, and management depend on financial reports for making a decision.
• Disclose Future goals: Managements create a strategic roadmaps for the company’s future. During the recession, the roadmap eases investor concerns by outlining strategies to improve the company’s position.
• Internal Vision: In finance and accounting, some companies use the internal reporting to keep employees informed of the state of their operations and the economy.
• Statutory Compliance: Organizations must file reports with agencies like ROC, government, and stock exchanges—on a quarterly or annual basis. Businesses are subject to statutory audits.
• Brings Transparency: Financial reports reveal how a company utilizes resources.

Conclusion

The above-mentioned financial statements recognize several areas of overall financial performance. A company’s financial report offers various financial details that investors and creditors use to evaluate the company’s financial performance. Financial reports are also important for company managers because by publishing financial statements, management will share their continuing achievements outside the company with interested parties. It includes various types of financial statements such as balance sheets, income statements, cash flow statements and statements of shareholder’s equity. And these financial reports represent the company’s performance and finances.

Read Our Article: What is Financial Statement Analysis?