Imagine running a business without financial records. Such a business will struggle to monitor and assess its financial performance. While it is difficult to fathom, some companies do not have adequate financial records of their business transactions. This is the case with small businesses such as micro firms or start-ups.
A new company could start from the home of its founder without adequate financial planning and organization. Consider a recently established business whose founder does not have bookkeeping, accounting, or finance background. In this scenario, he would focus on the products or services while keeping incomplete records of its business transactions.
Establishments with a long-term view and strong organizational practices record and make reports on their finances. Financial reporting is the detailed categorization of all the business transactions made by the company. These include the assets, liabilities, and owner’s equity that support the business operations. Other categories are revenues generated from the sale of products and services and the expenses incurred to earn the revenues.
The balance sheet report covers the assets, liabilities, and owner’s equity, while the income statement reports the revenues and costs. The cash flow statement reveals how much cash flows in and out of a company, while the idea of shareholders’ equity gives detail of equity investments in a company.
Financial reporting helps business owners, shareholders, and managers know their company’s performance. An understanding of the firm’s financial performance determines the necessary decisions for the growth and success of the firm. Sound business decisions can only be made after thoroughly evaluating a firm’s unique position and performance. Companies, however, will not be able to chart a new course for their enterprise until they understand the state of their business. This is where financial statement reporting is vital.
The balance sheet represents the company’s financial standing as of a specific date. This date is typically a month-end, a quarter-end, or a year-end. The income statement summarizes the revenues and costs for a period, typically a month, a quarter, or a year. Preparing accurate financial information is essential as it enables adequate budgeting and performance forecasts of a subject company.
Lenders and investors analyze a target company’s financial statements over a period to assess its business performance. These stakeholders strive to identify positive or negative trends that support or prevent investment in the company. The reports reveal information to determine the company’s profitability, solvency, liquidity, and efficiency.
There are several merits to having these reports professionally prepared. Some of them include their role in improving the firm’s debt management and increasing transparency. The risk capacity becomes well defined when the state of its short-term and long-term liabilities is known. An accurate set of statements improves clarity because investors and regulators can appreciate the precise picture of the company’s affairs.
Financial reporting provides insight into how well a firm is being managed and it also helps business managers plan for the future of their company. The more the health status of a company is known, the easier it is for decisions to be made.