Financial Reporting: What It Is and What You Need to Know

"Financial reporting" is one of those catchall phrases so generic it's almost meaningless. But the financial reports within that umbrella actually mean a lot to your business. Business owners and managers don't necessarily need to know how to generate the reports, but you should know how to read them. Learn more about financial reporting in general and financial reports that might benefit your company.

Financial Reporting: A Generic Definition

Financial reporting is a company's communication of its finance-related information to outside entities. Financial reports also inform boards of directors as well as guide management decisions.

Certain business types and funding arrangements require specific financial reporting. Publicly traded companies must report to the Securities and Exchange Commission on a quarterly and annual basis. Many nonprofit companies must produce annual audited financials. Grant-funded nonprofits usually have financial reporting obligations related to the grant award.

Financial reporting follows specified formats and generally accepted accounting principles (GAAP). Accounting standards make financial statements more meaningful. Standards allow those reviewing the financials to compare companies' financial positions.

Financial Reports Your Business Needs

The term "financial statements" refers to a collection of three core financial reports. These reports are critical for understanding a business' big picture finances.

  • Income statement: This is also known as the profit and loss (P&L) statement. The income statement spans a certain period of time. It shows a company's revenues, the expenses incurred to generate that revenue and the resulting profit or loss. The basic formula is Revenue - Expenses = Net Profit (or Loss). Revenue includes sales of goods or earnings from services provided. The income statement indicates whether the business is profitable during a certain time. This report also allows for comparison against industry benchmarks.

  • Balance sheet: The balance sheet reports on a company's resources at a point in time. It details the assets (what the company owns), the liabilities (what the company owes), and equity (investments in the company, plus profits). The basic formula is Assets = Liabilities + Equity. Use the balance sheet to calculate the company's net worth. Use this report to spot potential cash shortages.

  • Statement of cash flows: This report is useful for determining a company's ability to pay its bills. The cash flow statement highlights the changes in a business' cash activity over a period of time. The statement shows how much money a company is making and spending, where that cash comes from and how the money is being spent. The statement of cash flows reports sources and uses of cash in three categories: operating activities, investing activities and financing activities.

Useful Reporting Requires Real Numbers

You can use the information found in financial reports to control costs, make personnel decisions, apply for loans and make decisions about expanding your business. But if the source of the financial statements is inaccurate or incomplete, then the reports are useless. Your business demands accurate accounting systems and timely recording of transactions.

Do you need help generating or reading financial statements? Do you need to check the integrity and reliability of your accounting data? Contact Honest Buck, an accounting firm that can take care of your business accounting needs so you can focus on taking care of your business.