What is Financial Reporting?
Financial reporting is the fundamental process of recording, controlling, and documenting a company’s financial reports for a specific period. Company management uses financial reporting to analyze their financial performance. These records also help in generating future analysis strategies for the business.
There are several parts of financial reporting which include:
- Observing the entire data available
- Using the data to create official financial statements
- Managing the debt and equity ratios of company assets
- Analyzing the data for profitability.
All these parts are put together to create accurate and improved financial reports.
The current financial reporting dated back to the industrial revolution in the 18th century. Excessive labor forces and goods production at a larger scale came into existence. This revolution also started the calculation for indirect and direct costing.
To manage company accounts, industrialists used bookkeepers and accountants. These professionals worked the cost incurred in a given production line. Bookkeepers presented the reports directly to the company’s owner as C-suites were not developed.
When companies started to go public with the development of wall street, the purpose of financial reports was to attract investors. To gain investors’ confidence, accountants invented new strategies in financial reporting. As a result, in 1887, the United States of America established the American Association of Public Accountants (AAPA). AAPA awarded Certified Public Accountants (CPA) to skilled and experienced financial reporting and analysis professionals.
Before computers and spreadsheets, reports were handwritten. With the creation of spreadsheets and Microsoft Excel, reporting went digital. Accountants now use computers to calculate and analyze financial statements. For over fifty years, report creation has been a digital process.
In today’s virtually growing world, financial reporting is practiced through technology. Computer programs such as Quickbooks, Oracle Netsuite, and Freshbooks make financial reporting quick and easy. Accountants use these programs to manage company accounts on their costs and revenue.
Components of Financial Reporting
There are five major components of financial reporting.
An asset is any valuable resource that a company owns. It is helpful as it produces cash for the company. There are two types of investments, tangible and intangible.
Tangible assets are those assets that can be touched and are physically present. These include cash, buildings, inventory, accounts receivable, etc. Intangible assets are the ones that don’t have a physical presence, although they are precious to the company. These can be permits, patents, copyrights, trademarks, etc.
In financial accounting, liabilities are entities that a company owes and must be paid back at a prearranged date. Liabilities include cash borrowed from any bank or individual, assets not completely paid off, or even services used before payment.
A company uses liabilities to finance its operations and bring capital for business growth.
Shareholders’ equity is the amount of money invested by different individuals or corporations in a company. These individuals or corporations are known as shareholders or, casually, company owners. You find the total shareholders’ equity by subtracting the total liabilities from the total assets of a company.
An analyst uses shareholders’ equity to study a company’s financial situation.
The real money entering and exiting a business is known as cash flow. When there is more cash flow inflow than outflow, it is called positive cash flow. Therefore, more positive cash flow in a company’s cash flow statement determines the financial health of a company.
The optimum goal of any business in any industry is to maximize profit. Profit and loss are the amounts of money a company gains or losses in a given period. It is the difference between a business’s total cost and revenue. The difference is a loss if the revenue earned is less than the cost incurred.
Companies use financial analysts, business analysts, and sales & marketing professionals to develop strategies that minimize the total cost and increase the total revenue.
Who Uses Financial Reports?
Companies depend on financial reports to analyze the internal and external environment and decision-making process. Several individuals and institutions use a company’s financial statements to study and examine its financial position. These groups are
A company’s management uses financial reports to review its performance and advice further on new and changed strategies. These reports are a crucial part of business decisions.
Government regulatory bodies are responsible for monitoring the finances of every registered company (private and public). These agencies assist the government with taxation and the legal framework of businesses by analyzing their financial reports. Therefore, all the companies must register themselves with the Securities and Exchange Commission (SEC) in the respective operating country or countries.
Shareholders or Investors
Companies run on debt provided by banks or financial institutions and on equity invested by a group of investors. However, no investor invests money in the company before looking through its financial statements. These statements justify the company’s performance in the market concerning its competitors.
Importance of Financial Reporting
Financial reporting informs investors and institutions about a company’s financial health. Accurate and well-maintained financial reports give investors a clear picture of the company. This process makes the decision-making process easy for investors.
Two of the most important reasons to create financial reports are raising capital and preparing the financial analysis.
Companies, whether public or private, provide their investors with financial statements to bring investments. The invested capital can be used for business expansion, research & development, paying outstanding debts, etc.
Financial reports are essential for developing analysis. Well-developed financial statements help in the creation of better-quality financial analysis.
Challenges Faced by Financial Reporting Today
Professionals in the finance industry are unique in their skills and abilities. However, they face different challenges while improving the financial condition of their respective companies. Such challenges include
Manually Processed Reports
In today’s virtual world, with the advent of technology, financial reporting and analysis have never been easier. Companies use various computer programs to state all the capital conditions in a particular time frame. Despite that, many senior financial executives use manual reporting due to a lack of technological skills. The manual process brings many errors and slows down the department’s pace. The extra time involved in manual reporting can be more productive if the company uses it for better objectives.
Costs regarding Technological Advancements
Companies use advanced fintech programs to create financial statements. These programs are complex tools and need expert technical assistance to operate.
To operate these tools, companies hire technical experts and consultants to assist the company in reporting. Hiring these professionals can be very costly for the company. Apart from that, financial institutions have a limited tech department. This department can sometimes take months to finalize budgeting and reporting online.
Future of Financial Reporting
Reporting plays a significant role in a company’s financial decisions. Companies that produce the most accurate analysis achieve better results than their competitors or the industry average.
The future of financial reporting relies on growing financial technologies. Communication between stakeholders, the board of directors, and senior management is more efficient and effective. With that said, companies must become more transparent with their financial statements and strategies to account for all the investors.
All financial managers, executives, and analysts should develop the technical skills necessary in fintech. Several online programs teach the necessary skills to use financial technology programs. These programs make it easier for the management to understand digitalized structures and complex financial models. Studying these programs will make the process of financial reporting quicker and simpler.
The number of new financial institutions and startups is rapidly growing. All institutes now focus on a niche market, creating competition at different levels of services and products rather than the entire company. To grasp their position and market share in the industry, companies must develop strategies using Artificial Intelligence. These business entities should also use the best digital products available in the market.
Financial reporting is the essence of a company’s financial position presenting its current status. These reports help analyze and evaluate an organization’s market performance. It can be helpful to bring in more investors and keep the regulatory framework updated. Although there are costs and time associated with this process, it can develop beneficial financial strategies for the company.
The financial statements indicate the problems in the cost structure and what measures can prevent these extra costs.
The future of financial reporting relies on emerging financial technology. Using digital programs and AI-utilized strategies properly, accountants, bookkeepers, and financial analysts can boost a company’s financial structure.