Financial reporting is a diverse term that includes the whole accounting system of a business. Having an accounting system in an industry is one of the most critical aspects of a company and is essential for any business operating. The purpose of accounting is to calculate and collect financial information about the business and review it to determine the company’s financial position along with its performance and the cash flows of the business. For new startup businesses, it is better to start organizing all the aspects and departments from the very beginning as this is beneficial at the early stage and helps in the future. The main goal of accounting is to record and report a company’s financial transactions, financial performance, and cash flows. Accountants keep a record of a company’s transactions and keep financial data up to date. Having an accounting system helps the authorities to make better decisions as per the month’s analysis. Some key accounting terms an entrepreneur should know are GAAP principles, cash basis accounting, accrual basis accounting, and the concepts of accounts payable and accounts receivable. The accounting process typically starts with the bookkeeping of initial transactions. The information generated through accounting systems is vital to collect as businesses use it in the decision-making process. Business owners use this information to make decisions such as creating new plans for the company, identifying if the business needs any expansion or financing, and understanding if the company is making unnecessary expenditures.
The central aspect of financial reporting is understanding the financial statements. The four primary financial statements are The Balance Sheet, The Income Statement, The Cash Flow Statement, and The Explanatory Notes. Financial reporting is essential because it provides you with an oversight of the performance of your business. You are also required to create these documents because it is necessary for you to provide these documents to the IRS while filing taxes, banks when applying for a loan, investors when seeking investment funds, and managers and other authorities to make further decisions and plans for the business. Financial documents are also necessary for auditing. The key types of financial records for financial reporting are:
Income Statement or Profit and Loss Report: A business creates an income statement to calculate its cost of goods sold, gross profit, operating profit, profit before interest, and tax and net profit (or loss) over some time.
Cash Flow Statement: A cash flow statement determines all the cash inflows and outflows of a business and is one of the documents used to identify the company’s liquidity position.
Statement of changes in equity: Companies that sell equity shares have to produce this document. This document reports your company’s changes in retained earnings after paying dividends to shareholders.
Businesses create financial analysis reports which help the managers and authorities in the decision making and the budget planning processes. Many companies also provide these reports to stakeholders, especially investors. You can generate a financial analysis report by following these steps:
- Start with writing down the whole financial summary of the business period that just ended and includes your company’s overview and business style.
- Write up an investment proposal and explain why investors would want to invest in your business. You may write the benefits and disadvantages of investing in your industry.
- Through financial analysis, identify the overall value of your business. This valuation could be a key factor for investors to be interested in your industry.
- This step should include detailed and thorough results of your calculations and analysis for investors to get a better look at them.
- Make sure that you review and recap your whole report in this step and then state why you believe your business is worthy of the investors’ investments by highlighting the critical factors about your financial system.
- Remember that you should give proper attention and time to your financial reporting and not rush into things as these calculations are very complicated and require a lot of focus.