Optimizing Financial Reporting to Drive Business Growth
Business leaders often struggle to evaluate and define their company’s financial performance due to ungrouped and complex data. Untracked financial performance reduces productivity, as leaders cannot identify the exact department contributing less to the company’s financial growth. However, financial reporting offers a solution to this challenge by enabling businesses to track the company’s financial health.
In this article, I am going to go over what financial reporting is, how it contributes to the growth of a private company, and why you should consider implementing it.
What Is Financial Reporting?
Financial reporting is the collection and presentation of a company’s financial transactions and records to reveal the company’s financial status. The goal of financial reporting is to deliver pertinent and trustworthy information so that interested parties can make wise decisions.
Benefits of Leveraging Financial Reports in Your Business
When you have access to your financial reports, you can have better insight into the financial activities going on in your business. Financial reporting:
- Assists in strategic decision-making.
- Enhances communication.
- Supports strategic planning and budgeting.
- Facilitates performance-tracking.
Assists in strategic decision-making
Investors rely on financial reporting to gain crucial insights into a company’s financial status and well-being. This knowledge empowers them to make strategic decisions on whether to purchase, sell, or retain a company’s shares. Financial reports further offer an understanding of a company’s financial standing, enabling investors to evaluate the potential risks and benefits of investing in each entity.
Enhancing communication
Financial reporting is crucial in improving communication between a business and its stakeholders. By providing accurate financial information through reports, businesses can share essential financial data with investors, lenders, and employees. Building trust and credibility through communication is important for recruiting investment and preserving commercial ties.
Supports strategic planning and budgeting
Financial reports provide business owners with a historical overview of a company’s financial performance, which can be used to inform strategic planning and forecasting. Financial reports provide the information needed to develop financial projections and budgets, which can be used to plan for future investments, expenses, and other financial activities.
Facilitates performance tracking
A production manager can use financial reporting containing short-term data to monitor the immediate financial performance of their department. Based on the report, the production manager improves or rewards the performance of the production team. Department heads can see where to minimize costs and how to increase the company’s productivity to improve financial performance.
Key Elements of Financial Reporting
Here are some of the key elements of financial reporting in business.
Financial Statement
Financial statements serve as comprehensive report cards that company shareholders create to depict the precise financial state of the business from a particular period of time. The most used financial statements include the income statement, balance sheet, and cash flow statement.
Accounting Policies
Accounting policies must be applied uniformly over time to ensure the accuracy and reliability of financial reporting. These policies dictate the accounting methods used to measure and recognize financial transactions.
Auditor Reports
Auditors review financial statements to verify compliance with accounting principles. Prospects usually require an auditor report before making investment decisions.
Management Discussion and Analysis (MD&A)
Senior executives in a company compile a report on the company’s performance, outlining the sales, investments, and general successes or failures of the business. This might help the business find any gaps and make the necessary adjustments.
Types of Financial Reporting
Here are some common types of financial reporting:
Income Statement
Popularly known as the profit and loss account, the income statement shows the revenue generated, expenses incurred, and the company’s net income. The income statement is used to evaluate the general financial performance of the company.
Balance Sheet
The balance sheet displays the company’s assets, liabilities, and shareholders’ equity for a period of time. It provides an overview of what the business owns and what is owed to other entities. A balance sheet shows the managers the exact financial position of the business at any period in a financial year.
Cash Flow Statement
A cash flow statement shows how a company generates cash revenue while funding operational expenses and honoring its debt obligations. A cash flow statement, therefore, is essential in decision-making in a company, as it shows how much cash is available for the business to meet its operational costs and settle its debts.
Statement of Shareholder Equity
Shareholder’s equity is the portion of a company’s total equity that is attributable to its shareholders. Shareholder’s equity is an important financial statement for investors, as it provides an indication of the company’s financial health and the value of its investment.
Statement of Retained Earnings
The statement of retained earnings shows the total amount of profit accrued by the company after calculating the net income and paying off all the dividends to the shareholders. It measures how much in earnings is put back into the business after each financial year.
Who Uses Financial Reporting?
Financial reporting is equally vital to almost all stakeholders in an organization. Here are some of the key beneficiaries of financial reporting in business:
- Executive managers and directors: Managers require financial reports to keep track of the overall company performance and identify its strengths and weaknesses to make proper financial decisions.
- Investors and creditors: Investors require the financial reports of a business to examine how it utilizes the invested funds, while creditors require it to examine the creditworthiness of the business and its ability to pay back the credit used.
- Customers: Some customers require financial reports for the sake of transparency and trust.
- Workers’ unions and employees: Employees require financial reports to determine their performance and future in the company.
The Obstacles and Limitations of Financial Reporting
Financial reporting is a critical tool for stakeholders to assess a company’s financial health, performance, and prospects. However, relying solely on financial statements can be risky due to various obstacles and limitations:
Complexity of data
Financial reporting can be an intricate concept to grasp, especially for individuals who are not adept in finance. The financial statements can use accounting jargon, which might be unfamiliar to some stakeholders.
Historical information
Financial statements provide a record of past performance but may not accurately reflect current market conditions or future potential.
Lack of uniformity
Differences in financial reporting standards can make it difficult to compare private companies’ financial performance. Even companies within the same industry may employ diverse accounting policies, further complicating the comparison of financial statements.
Timeliness
Financial reporting is traditionally generated on a quarterly or annual basis, which means that stakeholders may have to wait several months to get the information they need. This delay can make it difficult for investors and other stakeholders to make informed decisions in a timely manner.
Key Features of a Successful Financial Reporting System
After looking at the beneficiaries and major types of financial reporting available, let’s look at some of the features a good financial reporting system should have:
- Accurate and timely data: A financial reporting system should provide data that is up-to-date and relevant to the current financial situation.
- Comprehensive reporting: A financial reporting system should provide reports that include all relevant information, such as income and expenses, assets and liabilities, and other financial metrics.
- Automation: Automation can help streamline the process of creating financial reports and ensure accuracy. Automated systems can also help reduce the amount of time it takes to generate reports.
- User-friendly interface: A financial reporting system should have an interface that is easy to navigate and understand.
- Security: A financial reporting system should have strong security measures in place to protect the data from unauthorized access.
- Flexibility: A financial reporting system should be flexible enough to accommodate different departments’ reporting needs.
The Role of BI Tools in Financial Reporting
Business intelligence tools can prove to be immensely advantageous in comprehending financial performance by offering a robust approach to generating financial reports efficiently and precisely. Following are some significant means by which BI tools can enhance financial reporting:
- Automated financial reporting: BI tools eliminate manual tasks such as data collection, thereby reducing errors and saving time.
- Financial report customizations: Users can create customized financial reports to meet the needs of stakeholders.
- Financial data visualization: BI tools can visualize financial data using charts and graphs, making it easier for users to comprehend the information. This feature can be particularly useful for stakeholders who are not financial experts.
- Identifying trends and patterns: Businesses can use BI tools to uncover trends and patterns more quickly with simple UIs and templates for creating reports.
Maximizing Financial Reporting Efficiency with Bold BI
Bold BI is a powerful business intelligence tool that allows you to convert data into actionable insights through user-friendly dashboards. It helps you change large and ungrouped data sets from various department records into interactive financial dashboards.
Embedding analytics within business applications through Bold BI enables end-users to access insights seamlessly, enhancing user experience and thereby easing decision-making. You can explore this blog to learn more about financial reporting metrics in Bold BI and how you can use them to run your business more effectively.
I hope you have a better understanding of financial reporting and the importance of a BI tool in showcasing financial metrics. Consider implementing a financial reporting system in your company by integrating with Bold BI. Try Bold BI by signing up for a free 15-day trial. You can contact us by submitting questions through the Bold BI website, or if you already have an account, you can log in to submit your support questions.
Originally published at https://www.boldbi.com on March 24, 2023.
