Financial reporting is a critical aspect of business operations, for investors and stakeholders. When it's done correctly, financial reporting provides investors with accurate information to prove the business is worth the investment. This reporting isn't only good for business, it is required from a regulatory standpoint.
Read on to learn about the types of financial reporting, global financial reporting requirements and the importance of financial reporting for businesses.
Financial Reporting 101
What is financial reporting? First and foremost, financial reporting provides a way to analyze business income, track changes and make decisions. Types of financial reports, which we'll explore in a moment, provide helpful information about cash flow, income and debts, and business performance overall.
By looking at these reports, stakeholders can make informed decisions about what's next for the business based on cash flow, assets and liabilities.
At a high level, you'll understand the financial position of the business and how it enables you to respond to market threats or opportunities. Looking closely at a particular aspect of business finances, you'll be able to make improvements to strengthen the business.
When you have financial reports, you can look at them to track future growth. This isn't crystal ball gazing; this is looking at where you've come from and making data-driven decisions about what you can expect in the future based on present and past performance. If the potential future of your business isn't what you hoped, there's still time to make changes and prepare for a desired future state.
Good reporting also provides up-to-date financial information for investors, for their benefit. Anyone thinking of investing in the company will want to know the business can make good use of their money. They'll want proof they will get a good return on investment by investing in your company instead of a competitor. Financial reports allow them to do their due diligence when planning investments.
Financial reporting also helps your business meet tax, accounting and legal compliance requirements.
Why Financial Reporting Matters for Public Companies
Public companies need the trust of investors to be successful, and financial reporting is the means through which they earn it. The transparency provided through regular reports means investors know what to expect and won’t be blindsided by changes in the company’s status. This reduces volatility in stock prices.
Reporting also gives analysts critical information they need to conduct analysis and modeling. Based on their findings, investors can gain confidence enough to throw their support behind the company. Another critical element of financial reporting for companies is how it reduces their compliance risks. Reporting such as filing 10-K, 10-Q, and 8-K forms is essential for meeting SEC regulations, and Sarbanes-Oxley also requires regular reports to be filed. Without proper reporting, companies risk having to file restatements that erode investor trust and face SEC enforcement.
Types of Financial Statements
There are several types of financial statements to know. Here are common financial reports businesses need to put together to be in compliance, regardless of whether they are large or small.
Income Statements
Income sheets track business finances for a set period, such as a quarter or a year. Since they report business profits and losses, they can sometimes be called profit and loss statements or P&Ls. Regardless of the name you use for this document, think of it as the central dashboard for business income and losses.
Income statements track income, expenses, revenue and (for publicly traded companies) what's known as earnings per capital share.
To break it down further, you might come across these terms on an income statement:
- Operating revenue: This is revenue from sales of products or services
- Net and gross revenue: Total sales revenue and gross revenue after costs
- Non-operating revenue: Revenue that comes from outside the business operation, such as interest, capital gains or investment income
- Primary expenses: Expenses related to administrative costs, general operations, deprecation or cost of goods sold (COGS) — including cost of goods sold (COGS), depreciation and selling, general and administrative costs (SG&A)
- Secondary expense: Expenses related to debt or asset loss
Cash Flow Statements
Cash flow statements show the financial health of a business in terms of how well its revenue supports expenses. A cash flow statement lists your cash flow by considering:
- Accounts receivable
- Accounts payable
- Wages
- Income tax
- Investment earnings
- Owned assets (such as equipment or real property)
- Cash payments
- Financing activities
Balance Sheets
A balance sheet shows the assets, liabilities and equity of the business for a set period, usually for one quarter. Balance sheets show the business liquidity in terms of assets, current liabilities (short- and long-term debt), and shareholder or owner equity, when relevant. The balance sheet is similar to the income statement, but for a shorter duration.
All Other Financial Documents
While the three statements mentioned above are the most frequently used financial statements, there are other statements to know. Companies can put any publicly communicated information into their financial report workflow, provided that it's relevant.
Here are some of the other types of documents to know:
- Statement of shareholder equity: This statement can be incorporated on the balance sheet for smaller companies. However, larger companies may wish to put up a separate document that displays shareholder equity.
- Statement of retained earnings: If there were changes in equity, the statement of retained earnings mentions this information.
- Quarterly and annual reports: Quarterly and annual reports given to stockholders are often incorporated into financial reports.
- Press releases: If you put out press releases related to quarterly earnings, these may be included.
- ESG reporting: If your company has an ESG component, you may wish to highlight it with ESG reporting.
Financial Reporting Requirements
While the nature of required reports varies based on the nature and type of business, there are several generally accepted accounting principles (GAAP) that apply to the reports. These are issued by the Financial Accounting Standards Board and are applied to any submissions made to the SEC. If the company is publicly traded, remaining compliant with these GAAP standards is crucial for maintaining trust in the markets. There are two factors to keep in mind when considering financial reporting requirements.
The first is financial reporting software. The right software makes it simple to gather the necessary documentation and pull information from different sources without losing accuracy. Investing in reporting software can enable your business to easily meet reporting needs while leveraging artificial intelligence and machine learning to streamline workflow. This also ensures that all documents are compliant with GAAP.
Investing in reporting software can enable your business to easily meet reporting needs while leveraging artificial intelligence and machine learning to streamline workflow.
The second item to keep in mind is the tendency of reporting requirements to change over time. It isn't enough to meet current requirements; you must anticipate the future of financial reporting.
A trusted partner is essential to provide guidance and help businesses future-proof their financial reporting using intelligent software.
International Accounting and Reporting Standards
Companies that do business overseas may be required to submit different types of financial documents and adhere to a different set of reporting guidelines. One example is the International Financial Reporting Standards, which includes profiles for 166 jurisdictions, including the European Union. Another is Form 20-F, which is required for foreign-based businesses that report to the SEC when doing business in the United States.
Common Financial Reporting Risks and Pitfalls
Public companies would do well to make sure their financial reporting practices are free from the most common mistakes and obstacles. Whether caused by negligence, ignorance, or malfeasance, these issues can harm a company’s ability to supply accurate reporting and put them at risk of losing valuation as well as being sanctioned by regulatory bodies. Some of the most frequent pitfalls that impact reporting include:
Weak internal controls
Manual data errors
Inconsistent data sources
Misapplied accounting standards
Late filings without filing Form 12b-25 to notify the SEC
Inadequate disclosure review
Poor cross-department coordination
The Role of Technology in Modern Financial Reporting
Fortunately, digital tools and platforms make it much easier for public companies to discharge their responsibilities with regards to financial reporting and avoid problems. Using a centralized reporting platform means companies create a single source of truth not only for internal users, but also for external purposes. These software platforms typically feature automatic XBRL tagging to eliminate manual data entry errors as well as version control and audit trails for visibility and accountability. A recent development has been the implementation of AI-assisted validation checks that make sure financial data included in reporting is accurate and verified.
Building Confidence Through Transparent Financial Reporting
Navigating all these obligations can be challenging for a business of any size. With best practices and the right financial reporting software, however, the process can be streamlined and made much easier. To learn more about what DFIN’s solutions can do for you, get in touch with us today.
