Financial reporting consists of financial statements and what are financial statements? They are written records that describe the business activities and financial performance of a company. Financial statements are audited regularly by government agencies, accountants and companies etc to ensure compliance and accuracy for tax, investing and financing purposes.
When we talk about financial reporting, we are referring to these 3 financial statements:
- Balance sheet – it provides a snapshot of the company’s overall assets, liabilities and stockholders’ equity within a specified period of time.
- Cash flow statement – it measures how well a company is able to generate cash to pay off its debt obligations, pay for its operating expenses and fund investments.
- Income statement – this primarily focuses on a company’s revenues and expenses within a specific period of time. Once the expenses are subtracted from the revenues, the company’s statement will produce a profit amount and that is termed as net income.
Why is financial reporting or why are these financial statements important? Not only are they used by the key decision makers of a company to make informed decisions but they are also used by market analysts, investors and creditors to evaluate the financial health and potential income of a company. So how do we ensure the financial reporting is accurate and of good quality?
Here are 5 best practices in financial reporting which you can adopt in your business:
1. Be diligent and consistent in every transaction
Do not wait till the last minute to log in one whole year’s worth of transactions, that might abound in more errors when you are in a rush. If you find that you are unable to do it on a daily basis, set time to clear at the end of every week or at the end of every month.
Depending on which frequency you have chosen, either 1 to 4 hours should do the trick. With the current technology, there are many cloud-based accounting software like Xero, QuickBooks etc so you can do it and access the data real time, anytime and anywhere. Log in every expense, payroll, revenue and net profit etc. It is important to record everything because at the end of the day, if the numbers do not add up, it might come off as a red flag to investors and stop them from partnering with you.
2. Set up the accounting system correctly
Many companies fail to maximise the functionality and value of their accounting systems. These systems are created to generate useful data whenever you need so valuable insights can be gleaned and used to tweak business strategies, processes and improve the financial performance of the company.
Failing to integrate the accounting system fully with your business leads to a waste of resources, money, time and poor decisions. The integration is a critical first step so make sure it is set up correctly and run a diagnostic often as a quality control measure to check that things are running efficiently.
3. Know the closing deadlines
It is important to know when the closing deadlines are as penalties will be imposed if the necessary documents are not submitted in time. From experience, there are usually a few checks even if the books are recorded in a consistent manner.
Because the accountant and auditor need to ensure that the information is accurate and get the agreement from all business owners before submission to the government agencies for compliance. The financial reporting needs to be adhered to the standards of the International Accounting Standards Board (IASB).
4. Analyse historical metrics
It is recommended to conduct a regular review of the company’s business performance and one good method is to compare the current period with historical metrics to analyse and determine trends, risks and seasonalities.
A predictive model to forecast future projections can then be made and continuous tracking needs to be performed to check the predicted figures against the actual figures to improve the accuracy of the model.
5. Automation is necessary
The current business world is moving at a fast pace and with advancing technology, it is advisable to automate all your financial processes including payments received, invoicing, revenues and expenses etc.
When everything is automated, keeping your books in order will no longer be a hassle and you can be sure that your records are always up to date. Even generating reports for analysis or for presentation to stakeholders and investors, will be such a breeze.
In summary, financial reporting does not need to be a painful and troublesome journey. All you need is the right tools, automation and you will be at the top of your game anytime when it comes to financial reporting!