Understanding Financial Reporting: What is it and Why it Matters?

As an entrepreneur, you understand that your business is considered on a high growth trajectory only when measurable, comparable, and accurate figures indicate it. 

Financial reporting is one of the most crucial parts of this process. It helps manage the growth of your business, stay on track for your objectives and milestones, and make informed decisions.

This article discusses financial reporting and lists its components and the key benefits.

Financial reporting explained

What is financial reporting?

It is the accounting process for communicating financial information to internal and external stakeholders. 

Financial reporting is often achieved by the core financial statements: balance sheet, income statement, and cash flow statement. But it can also come in many other forms, depending on the reader’s information needs.

• For internal stakeholders: The process can comprise any financial reports that senior management wishes to generate, such as sales reports, trends, and key performance indicators (KPIs).
• For external stakeholders: Financial reporting usually comprises 10-Q and annual 10-K report filings to the Securities and Exchange Commission (SEC).

What is its purpose?

Financial reporting provides insight into a company’s financial position, cash flows, and operations. It equips external and internal stakeholders in the company with the correct information at the right time to make better-informed decisions. 

What does it include?

Financial reporting demands significant time and effort. Many reports and documents are to be derived from several different departments in a company, as illustrated below: 

Midsize firms: Controllers and accounting teams oversee the financial reporting process.

Public companies: CFO, CEO, and external auditors certify information. The investor relations department handles the distribution of information to the public. 

Small businesses: The lead accountant or business owner manages financial reporting, often with external accountant support.

Regardless of company size, financial reporting includes:

• Financial statements
• Notes to the financial statements
• Quarterly and annual reports to stockholders
• Statement of Shareholders’ equity
• Management’s discussion and analysis(MD&A)
• Communications regarding quarterly earnings and other related information
• SEC filings, including the 10-K and 10-Q, or even the 8-K report (for unscheduled material events or corporate changes)

A critical aspect of financial reporting is timeliness, as even the most accurate report loses value if it is outdated.

Why is financial reporting critical?

Here are four reasons why financial reporting is vital to your business:

Compliance

Financial reporting is essential because it ensures compliance with applicable regulations and requirements. 

Securing capital

A company’s financial story is significant when raising capital through public markets, private investments, or bank loans. External parties and investors rely on financial reports to assess the company’s creditworthiness and operational robustness.

Financial planning and analysis

Financial reporting is indispensable to internal company management in planning and forecasting. It is a foundation for analyzing operations, computing cash flow efficiency, or measuring KPIs.

Reassurance

Investors, partners, customers, and suppliers often also use financial reports to form predictive opinions regarding the future performance and viability of the firm. 

The final word

Financial reporting can be complex, but it’s essential to running a successful business. Though every company has a slightly different system to meet its unique reporting requirements, there’s much in common from business to business.