Importance of Financial Reporting
Company financial statements are one of the most important ways business owners and executives can keep watch on the financial health of the business. If done properly, they present an unbiased truth. “The numbers don’t lie” as they say. Business leaders who are committed to ensuring that their financial statements are accurate – and who are willing to confront the truth – will have a better chance at growing healthy companies.
Even if founders and company management aren’t invested in accurate reporting, external stakeholders will demand it. Investors, banks, government funding programs, and tax authorities require complete, up to date and accurate financials. Every time.
The ‘When’ and ‘Who’ of Financial Statements
Financial Statements can be compiled at any time and for any period. Just sign in to your accounting software (e.g. Quickbooks, Xero, Netsuite) and find your way to the reporting section.
Annual financial statements are typically compiled by an external accounting firm. These statements can then be shared with investors, banks, government programs and tax authorities.
Quarterly financial statements are required for public companies. These are disclosed to the public markets. Some larger private companies share quarterly reports internally.
For start-ups and other dynamic small businesses, each month can be like a quarter or a year in a large enterprise. A lot can change. Although there is no requirement for monthly financial reporting, it is a healthy practice to review financial statements at least monthly.
A financial report implies a disclosure to a stakeholder. The content of the report may include the standard financial statements in whole or in part and may include other reports and information. A financial update implies a short-form financial report. Delivered in between formal reports and may include interim financial statements. For instance, founders often provide monthly or quarterly financial updates to their investors in between the requisite annual financials.
It is important that for any report, the books be complete, correct and up to date. If you pull your own reports from your accounting software these are called “management financials” or “draft financials” as they’ve not been reviewed by an accountant. Disclose them as such if you must share them. Of course you may use any management financials internally, just beware that there are no material transactions as yet undocumented or explained in the books.
Now, onwards to the financial statements themselves. There are three:
- The Profit and Loss Statement
- The Balance Sheet
- The Statement of Cash Flows
The Profit and Loss Statement
Also known as the Income Statement. This statement sums up the revenues that have been earned and expenses that have incurred by the company over a given period of time. Subtracting expenses totals from revenue totals gives useful summations like Gross Profit, Operating Profit and Net Income. As the primary objective of most businesses is to earn profit (either now or in future periods) this statement is often the first stop for those analysing financial performance.
On the surface, the concepts of ‘Revenue’ and ‘Expenses’ may seem intuitive. Diving further in reveals that the decisions involved can be subjective and complex. Companies must decide when revenue has been earned. Companies must allocate expenses over months, or split them between departments or accounts.