The benefits of financial reporting become obvious once you understand the purpose it serves both inside and outside your company. Financial statements provide a vivid picture of your company’s financial situation in real time. Staying abreast of your company’s finances can mean the difference between success and failure.
Here’s one example of how sound financial reporting benefits your business. If you examine your financial statements closely enough, you’ll know when you’re about to spend money you don’t actually have and be able to stop yourself before you do any real damage. In better times, this close scrutiny will alert you when you have enough money to invest in the growth of your business.
Primary Financial Statements
There are three major financial statements – the income statement, the balance sheet, and the cash flow statement. The balance sheet is the most fundamental of the three. It shows the relationship between liabilities and equity, and how together they comprise your total assets. An “asset” is any item that is owned or owed by the business. “Owners’ equity” is the amount remaining after subtracting liabilities from the assets. This is the owner’s stake in the business.
The income statement is also called the “profit and loss” statement. It depicts the profitability of the business during a specific time period. The cash flow statement shows the transformation of finances from accrual form to cash form. The exchange of goods and accounts to cash is considered the business’s cash flow.
Here are three important ways financial reporting can help your small business.
1. Decision-Making Mechanisms
Financial statements give you great decision-making tools. They indicate business trends and tendencies, showing how the firm is collecting money and at which rates creditors are being paid. They also show any abnormalities that might interfere with the cash flow of your business.
For instance, accounts receivable reports depict who is paying the business on time and who is paying late. You can then look at these reports to make educated decisions on who needs more collection efforts or reminder notices, and which customers are more reliable. Accounts payable reports show you what your business owes and to whom. Some reports can even help monitor your inventory count and its valuation .
No matter what questions you might have about your business, proper financial reporting can provide you with an answer. Try to follow the GAAP Finance Rules and Standardized Reporting to ensure your financial reports are as accurate as possible. This is especially true if your questions have to do with your inventory, debts, or profits. When looking to improve your business, this information is invaluable.
2. Getting Credit When You Need it: One of the Key Benefits of Financial Reporting
Whether it’s part of a growth strategy or just a way to stay afloat and viable, every business needs credit at one time or another. This includes business loans, credit cards, and credit lines with vendors. All of these lenders will need some type of guarantee that they’ll get their money back in a timely fashion. To get this guarantee, the lender will want to check your balance sheet and credit report.
The balance sheet gives an accurate impression of how much you already owe, but it also shows them the current state of your cash flow. As an aside, an internal accounts payable report will keep you on top of your bills and help increase your credit score.
3. Financial Reports Help You Remain Compliant
Local, state, and federal agencies require you to submit quarterly tax returns, and you can only prepare these if you have the proper financial statements. Here are some additional details regarding financial reports and compliance:
- A sales report distinguishes between taxable and nontaxable sales and will help you calculate the sales tax you owe.
- Payroll liability reports present the tax obligations you have associated with paying your employees.
- In the case of an audit, you’ll have to provide any information related to filing your taxes. The three primary financial statements usually fulfill this obligation, but the auditor may require additional statements as well. Lastly, you must be able to back up this documentation with hard copies of things like pay stubs and receipts.
Understanding the benefits of financial reporting is always the best way to motivate you to keep good records. The key is getting started right away.
About Zach Inghram
Zach Inghram is a CPA and holds a BBA in accounting from Loyola University Chicago. He has a diverse professional background having held analyst, accountant, and audit roles within the insurance, infrastructure services, and oil & gas industries. As the sole proprietor of Inghram CPA, he provides tax and bookkeeping services locally in the Austin, TX area and remotely around the country. His clients commonly remark that he holds himself to the highest standards of honesty, integrity, and professionalism. In his free time, he and his wife enjoy being outdoors hiking, camping, gardening, and fishing.