The Importance Of Financial Reporting & Producing Reliable Reports
When you’re managing a business, financial reporting is just as important as the finances themselves, but it’s something that many businesses neglect. It’s understandable. As the owner, you have a lot on your plate. But, reliable financial reports are much more than just an obligation; they can be the most insightful documents regarding all aspects of your company.
Types of Financial Reports
Think of your business as your child. Don’t you want to have those family pictures hanging on the fridge so you can look back at what was happening in the good times? It’s just as helpful to look back on the bad times so you can learn from your mistakes.
Financial reports can do just that, and it’s why they need to be tended to on a regular occurrence. There are a few financial reports that business owners need to run regularly in order to get the best grasp on their business’s health:
- Profit and Loss Statement – also called P&L statements. These reports detail the income and costs that go into running your business and help to calculate revenue.
- Balance Sheet – a financial snapshot of your business. This report is designed to show all your business’s assets and liabilities at a moment in time. Balance sheets should include accounts payable, accounts receivable, cash, inventory and any debts.
- Statement of Cash Flows – a blend between an income statement and balance sheet. While balance sheets are a financial snapshot, cash flow statements show the movement of money, both in and out, over a longer period of time. These are best used for perspective on the overall health of your business.
Benefits of Financial Reporting
Looking at all the reports you’ll have to run, it might leave some business owners wondering if the benefits outweigh the time that has to be spent compiling them. If you’re interested in succeeding and making money for your company, then you’ll take the time to ensure the accuracy and reliability of your financial reports.
There might be several departments in your company that work independently from one another. It’s hard to judge the overall strength of your company based on one department. The sales team might have a record year, but if production doesn’t keep up, your business is going to struggle. There is one area, however, where every department in your company comes together: finance and accounting.
By running regular reports, you can get the most accurate, up-to-date information regarding your company’s overall health and efficiency. You can see exactly where problems are occurring in one convenient location.
While many financial reports are just a snapshot in time, if they’re prepared regularly, they can be compared against one another to provide detailed information over time. A single balance sheet won’t tell you much about you company’s growth, but if you have twelve monthly balance sheets in front of you, you’ll be able to tell how the company has grown, downtimes, uptimes and any trends that have occurred throughout the year. You can then use that information to help you build a more accurate business plan.
Can you take out another loan to help pay for increased manufacturing costs? Without accurate financial reports, that question is difficult to answer. Using financial reports, you can accurately determine what your company can and can’t afford in the future. They can also help you manage your current liabilities.
Accounts receivables is one of the most important liabilities that you need to track. Making sales is great, but it won’t help your business unless you get paid. Many businesses end up in trouble because they forget to keep a constant watch on their receivables.
Progress and Compliance
The true importance of financial reporting comes from SEC. Most companies are required to file financial statements with the government. Keeping up with your statements regularly will ensure that you’re not scrambling around last minute to get them finished. If it becomes routine, then you’ll never have to worry about it when the deadline approaches.
For companies that have stockholders or use a profit-sharing system, financial reports are also a good way to show the financial health and progress of the company to keep investors on board.
Yes, it might mean some extra time spent in the office but producing regular and accurate financial reports will help your business to grow and improve in the future. They are the best way to get insights into the overall health of your company and every department within. But remember, only accurate reports are beneficial. If you’re not confident preparing your own financial reports, it’s always helpful to consult with a professional.
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