Today, we take a look at the ins and outs of financial reporting, its importance & its future in this digital world.
Financial reporting is one of the bedrocks of any business. While most people are somewhat aware of the importance of financial reporting(most likely because it is a legal obligation to prepare those records), you may not know things that are above and beyond that.
Today we will be discussing the answers to the following questions:
- What is financial reporting?
- Why is financial reporting important?
- What is the future of financial reporting?
So, if you are keen about the business of doing business, or just want to keep yourself updated with knowledge on financial analysis and reporting, you’re at the right place.
What Is Financial Reporting?
Financial reporting is essentially a way of recording, maintaining and then presenting the standard financial records of the business. On the most general level, financial reporting gives the world an accurate depiction of a business’s KPI(key performance indicators), including(but not limited to):
- Expenses Incurred
- Revenue accrued
- Profits achieved
- Overall Capital
All of these financial metrics are important because they show the true “financial health” of a company. In most cases, there are 2 major financial reports every business has to prepare and present to the government, the investors and ultimately, the decision makers. They are:
1. Profit and Loss Statement:
A profit and loss statement details how much profit — or loss — a business has made during a designated period, once operating expenses are subtracted from overall revenue. The most important piece of information extracted from a profit and loss report is whether or not a business is earning a profit, and how much it is earning or losing.
2. Balance Sheet:
A balance sheet is a statement of the financial position of a business which states the assets, liabilities, and equity at a particular point in time. An audited balance sheet is often demanded by investors, lenders, banks, and even the tax authorities.
Why is financial reporting important?
There might be moments when you might have asked yourself this question — what’s the point of preparing financial reports? and, why even bother?
Well, today we will talk a little about the importance of financial reporting.
For the government and tax authorities
This is arguably the most important reason to prepare the financial reports — because, well, you have to! The government uses these reports to make sure that you’re paying your fair share of taxes, doing everything under the legal boundaries set by them, haven’t broken any International laws, and are continually staying tax compliant.
For Investors, Banks & Other External Parties
If you’re considering getting an investor on board and seek money from them, it only makes sense that they would want to know how well that company is doing financially.
This also applies to banks who you might be considering to lend you loans which will again help you grow your business. In these situations, the concerned authority needs an accurate understanding of how likely they will be paid back. All those answers are in the financial reports of a business.
For Decision Makers
A company’s long-term and short-term goals, sales or earnings forecasts are all things that can be determined with information from financial statements mentioned above along with an understanding of best business practices and market trends.
It’s therefore severely crucial that the creation and further analysis of financial reports is not taken for granted because otherwise any management decisions taken will be based on a shaky foundation.
What is the future of financial reporting?
The world around is moving so quickly that even last week’s data might seem irrelevant for certain decisions. That’s why access to real-time information is his the newest way of reporting ultimately helps businesses understand the fundamentals of their finances.
The Future of Financial Reporting is on the Cloud
Let’s first establish the premise about what cloud is all about.
Cloud abolishes the need for traditional on-premise systems used to store, manage, and process data. Cloud provides organizations with instantaneous access to their data.
Whether that’s the decision maker checking the position of assets of his business on his mobile phone, a sales manager evaluating the profits and loss of his company on his laptop, cloud gives multiple users the freedom to access the financial reports whenever and wherever they need.
Thus it can be rightly presumed that the businesses and enterprises of the future would depend on reliable cloud accounting solutions. These cloud platforms would provide a higher level of accessibility along with reporting features that would give decision makers and accountants the power to function in harmony.
While these capabilities open doors to more accurate reporting, this is merely scratching the surface of the cloud’s capabilities today. Its potential to elevate the collaborative capabilities of traditional business processes is exciting.
With several cloud accounting platforms already on the field today the discussion should not be whether or not one should move their accounting to the cloud, but how to make the transition as quickly as possible and leverage from these advancements in every possible way.