Financial Reporting and Analysis: Definition, Importance & Types
Have you ever wondered how businesses track financial performance? Understanding a company’s operations from top to bottom plays a big role in financial planning. There is a broad range of analysis capabilities that can help a business make more informed decisions.
This article breaks down everything you need to know about financial reporting and analysis. Read on to learn more about the benefits and different types of financial reporting.
Table of Contents
What Is Financial Reporting?
Financial reporting refers to how a business organises and shares its financial data. This can include expenses, revenues, cash flow, profits, and capital. These reports provide an inside look into the financial information of a company.
Financial reporting involves providing stakeholders with an overview of company financials. Some of the most common types of financial statements include the income statement, balance sheet, and cash flow statement.
As mentioned, financial reporting is vital for businesses. Every business is different, but they all have financial reports. These get compiled and reviewed on a regular basis. It could be monthly, quarterly, or yearly.
With financial reports, you can gain insights into the performance of the company. And you can uncover opportunities to make more informed business decisions.
Why Is Financial Reporting Important?
Financial reporting helps you make better business decisions. This can surround everything from overall operations, current growth, and profitability. All of these reports are helpful for business partners, departments, stakeholders, and finance.
Breaking down financial reports will let you know if the business is performing well or not. Below are some of the biggest reasons financial reporting can be important.
When a company is transparent, it builds trust both internally and externally. Every level of a company relies on accurate financial data to make proper business decisions. This can include planning and creating budgets and monitoring results.
Financial reports give stakeholders information about the direction and performance of a business. To ensure transparency, finance teams should engage with external stakeholders.
Adhere to Compliance Requirements
Compliance is an important area for finance teams, the company, and executives. For financial statements to be trusted, compliance with all accounting principles is important. Compliance also relates to investor requirements and industry standards.
In South Africa, one of the biggest areas of compliance is the International Financial Reporting Standards (IFRS). The Financial Accounting Standards Board (FASB) creates and reviews the guidelines in the IFRS.
This shows how crucial it is for the finance and accounting teams to be familiar with new updates. It also shows that changes, rules, and regulations are necessary to guarantee compliance and accuracy.
Optimise Cash Flow
Financial reporting helps finance teams analyse cash flows to identify current and future cash flow risks. This ensures the company has enough cash flow to expand. It can also help the company explore opportunities as it presents themselves.
Finance teams play a critical role in assisting the business. They help with understanding the importance of monitoring cash flow. They also play a big role in discovering potential opportunities, threats, challenges, and risks.
Improve Business Processes
Tracking finances improves a business’s agility. How? Because the business gains further info on performance. Financial statements contain comprehensive data on many areas of an organisation. These include:
- Cash flow
We use these numbers to track past performance, pinpoint strategic spending areas, and make projections. They also serve as a common starting point for evaluations of finance teams with their business partners.
There are a few things that help enhance the role of financial statements. Included are communication and the capacity to translate complex statements into clear ones.
We use financial statements to understand, connect, and take action in business. Instead of just reporting the numbers, a finance team wants to bring the company together.
Types of Financial Reporting
Financial reports and statements give businesses a picture of how they’re doing financially. There are four main categories of financial statements. These include the income statement and the balance sheet. Also included are the cash flow statement and the statement of changes in equity.
Here is a breakdown of the main types of financial reporting:
An income statement is also referred to as a profit and loss statement. It’s a financial analysis report that displays company earnings over a specified time. It focuses on four essential components: revenue, expenses, gains, and losses.
This statement’s main goal is to determine whether the company is profitable. It accomplishes this by creating a list of a few things. (For example, sales activities, production costs, and operational costs for an accounting period.) We calculate the profit or loss of the company by deducting the revenue from all expenses.
A balance sheet offers a look into a company’s financial situation at a specific time. It is the most significant of the four financial statements. It lists assets, liabilities, and shareholder equity. Balance sheets help businesses determine their true net worth.
Cash Flow Statement
The cash flow statement (or statement of cash flows) describes how much money a company makes and spends over a specific time. It’s based on a company’s investing, operating, and financing activities.
This statement provides businesses with information about a firm’s liquidity and solvency. They can learn how a company manages its cash flow. This can be for daily operations, debt repayment, and funding ongoing costs or potential investments.
A cash flow statement also helps lenders and investors in determining repayment.
Statement of Changes in Equity
This financial statement shows how a company’s retained earnings have changed. It focuses on the changes following the distribution of dividends to stockholders. It allows for an understanding of what variables affect an owner’s equity during the accounting period.
A company’s income statement and balance sheet do not include certain types of transactions. Some of these include dividend payments and withdrawals of equity. As a result, shareholders and investors can make better investment decisions.
Benefits of Financial Reporting
Some of the benefits of financial reporting can depend on the type of business and the industry. There are a few main benefits that companies get in return for accurate financial reporting. They are:
Whatever aspect of financial activity you want to track, you will be able to spot past and current trends. This gives you the power to address any potential issues. You can also focus on improving the health of the company.
Maintaining the financial stability of your business depends on managing your liabilities. There are several key liabilities to manage. These include credit extended by vendors, business loans, credit cards, and credit lines.
Planning to apply for a business expansion loan? Be sure to examine financial statement data. This helps determine whether you need to reduce existing liabilities or not.
Improving Debt Management
Debt can restrict any company’s growth, regardless of industry. Financial analysis helps track current assets and liabilities on your balance sheet. This helps you gauge your liquidity and manage any debts.
Having Better Communication
Gaining access to crucial financial data will help you respond to problems faster. You can also enhance internal communication throughout the organisation. The company will become more effective, innovative, and protected against potential compliance issues. Ensuring everyone is aware of current trends also improves sharing of financial data.
Financial reporting and analysis give insights into the financial performance of a business. Common types of financial reports include the balance sheet, income statement, and statement of cash flow. Understanding the details of financial statement analysis capabilities is crucial. It helps a company determine its financial health.
Income statements and cash flow can provide actionable information for stakeholders. This includes both internal and external stakeholders.
A company’s financial performance relies on its business performance. A good financial position can help attract more investors. This can especially be true for publicly traded companies.
FAQs on Financial Reporting and Analysis
What Are the Tools of Financial Analysis?
There are many tools that can track financial analysis. Essential tools include vertical analysis, ratios analysis, and horizontal analysis capabilities. These tools help ensure compliance and provide an accurate depiction of company financials.
What Is a Financial Analysis Example?
Analysing a company’s performance using financial ratios is an example of financial analysis. We do this by using the net profit ratio.
What Is the Scope of Financial Reporting?
Sure, you can disclose data through income statements, balance sheets, and legal requirements. But financial reporting is more than just that. For instance, we include non-monetary information in financial reporting. We also include monetary information.