7 Top Reasons Why Accurate Financial Reporting Is Crucial To Your Business

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Financial reporting refers to the use of financial statements to disclose financial data for an overview of the financial health of a company during a specific period of time. Financial statements consist of the balance sheet, the income state and the cash flow statement. A lot of the financial information is required by law or by accounting standard practices. 

All of this information is important to the management so they can make informed decisions about the company’s future business direction and strategies. It also provides an insight to stakeholders, investors and creditors on the profitability and financial stability of the company. Therefore, accurate financial reporting is fundamentally important. 

Here are 7 top reasons on why accurate financial reporting is crucial to your business:

financial reporting

1. Tax purposes

The most legitimate reason to use financial reporting is that you are required by law to do so. The Accounting and Corporate Regulatory Authority (ACRA) is the regulatory body of business entities, public accountants and corporate service providers in Singapore. They ensure the payment of taxes. 

Businesses that make a lot of profits need to pay a lump sum of corporate taxes. Accurate financial reporting helps businesses to reduce the corporate tax burden and also helps them maximise their resources so they are not depleted in a short period of time. 

2. Financial condition reveal

Potential investors want and have the right to know how well the company is doing before they invest. Investors, creditors and stakeholders rely on a company’s financial reporting to derive the profitability and risk of their investments. 

They will want to know where their money went and where they are now. The balance sheet will provide detailed information about the company’s asset investments, outstanding equity and debt. With this information, they can better understand the company’s position and capital mix. 

3. Evaluating operations

The balance sheet provides a snapshot of the company’s assets and liabilities at the end of a financial period. But it does not show the operational issues that might have caused a change in the company’s financial health. Therefore operating results during the period is also something that investors, stakeholders and creditors will consider.

The income statement shares results about sales, expenses, profit and losses. From this, investors can evaluate the company’s past income performance and assess the future cash flow. 

4. Cash flow

A company’s profits are reported in the income statement but do not provide direct information about the company’s cash exchange. During the period of non-operating activities, a company incurs cash inflows and outflows which are mainly investing and financing. 

Cash from all sources is what pays the investors back. Hence a cash flow statement is imperative for the investors to review. The cash flow statement demonstrates the exchange of cash between a company and external work during a period of time. A review of this statement will highlight to investors whether a company has enough cash to pay for expenses and purchases. 

5. Shareholder equity

The shareholders’ equity statement is important to equity investors because it shows the changes to various equity components. Eg. Retained earnings during a period. The shareholder equity is calculated by using a company’s total assets to minus its total liabilities and it indicates a company’s net worth in a nutshell. 

Steady growth in a business’s shareholder equity due to increased retained earnings only means higher investment returns for current equity shareholders. This is better compared to increasing shareholder base. 

6. Planning and forecasting

When a company needs to make business decisions, a thorough analysis of the financial statements is necessary. Managers can look at the value of assets that a company currently owns and decide if they have the budget to purchase more. Conversely, if the value of assets is severely depreciated, managers can decide whether they need to be sold off. 

7. Reduce errors

Accurate financial reporting can help to spot a business’s costly mistakes and perform an early salvage in the process. Financial statements are also a good way to detect illegal financial transactions such as fraud or embezzlement. Through the reconciliation process, errors can be rectified. 

Companies spend a lot of time reconciling their accounts and verifying every individual journal entry so they will know first hand whether the accounts are incorrect due to an accounting error or whether someone is tampering with any part of the business. 

In summary, it is crucial to conduct accurate financial reporting because it can mean the making or breaking of a business. The right strategies can then be implemented at the right time and resources are maximised effectively. 

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