What is financial reporting and how to simplify it?
What is financial reporting?
Financial reporting communicates your company’s financial information to internal and external stakeholders. This process usually involves creating and sharing key financial statements like balance sheets, cash flow statements and income statements.
Some reports are solely for internal use, tailored to your business objectives and crucial decision-making needs. However, external reporting for stakeholders like investors, lenders, regulators and tax agencies usually have stricter requirements. Depending on the audience and purpose, you may need to comply with specific reporting rules.
Types of financial reporting statements
Balance sheets
Balance sheets show your company’s financial position at a specific point to assess net worth and potential for growth. They list assets, liabilities and equity using this formula:
Assets = Liabilities + Equity
Assets can include liquid cash, accounts receivables, inventory, prepaid expenses, property, equipment and intellectual property like trademarks or patents.
Liabilities cover any outstanding balances or debt, such as accounts payable, wages payable and dividends payable.
Shareholder’s equity is a company’s total assets minus the total liabilities. It shows what the company could distribute to shareholders if they liquidated assets and settled debts.
Cash flow statements
Cash flow statements track funds coming in and going out during a fiscal period. They examine accounts receivable against accounts payable, along with total operating expenses, debt obligations and investments.
A cash flow statement helps you gauge your company’s ability to meet financial obligations and fund both operating expenses and potential growth. It provides valuable insight into your financial standing, illustrating the flow of funds.
These statements don’t require calculations with a specific formula — they simply reveal cash movements in your business. They may highlight cash flow from:
Operating activities like accounts receivable, inventory and accounts payable
Investing activities like asset purchases or sales, or payments related to mergers or acquisitions
Financing activities like receiving cash from investors or banks.
Income statements
Income statements detail your company’s revenue, expenses, net income and earnings per share over a fiscal period. Also known as profit and loss (P&L) statements, they include revenue from operating costs, earned interest, strategic partnerships and royalties.
These reports are crucial for determining a company's profitability, especially over an annual fiscal period. Many businesses regularly compare income statements to assess growth, either quarter-over-quarter or year-over-year.
Statements of changes in shareholder equity
These reports monitor equity over time, often using balance sheets to track equity changes.
While formulas vary from business to business, it’s common to calculate changes in shareholder equity by adding net income, subtracting dividends and adding or subtracting other comprehensive income to the equity at the end of the previous period.
What is the financial reporting process?
Financial reporting can be complex, often requiring information from multiple parts of the business. Most data, however, will come directly from the accounting department.
To create a financial report, the person responsible typically follows these steps:
Identify the types of financial reports needed and the purpose of the reports
Gather key data, including financial statements, loan balances and annual tax payment reports
Source extra information from necessary departments, like accounts payable or accounts receivable, or other tools, like invoicing software
Account for asset depreciation
Confirm that all information is up-to-date and accurate
Compile reports in compliance with internal and external regulations, including Australian accounting standards.
Benefits of financial reporting
Though financial reporting can be time-consuming, it’s essential for businesses of all sizes and offers several benefits, including:
Ensuring legal compliance
Accurate reports may be necessary for tax agencies, shareholders, lenders and investors.
Making informed decisions
Businesses can use current financial data to guide smart choices.
Attracting investments
Clear financial status reports can assure third-party investors and shareholders that your business is a wise investment.
Securing funding
Transparent, detailed reports can help you obtain capital through private investors, lenders or public markets.
Identify key financial trends
Spot patterns in your finances to plan effectively and adjust during seasonal highs and lows.
Increase cash flow
A better understanding of profit and expense management can improve your cash flow.
Financial reporting best practices
To create accurate reports and leverage their full value, consider these four financial reporting best practices.
1. Update financial reports often
Accurate reports are up-to-date reports. Because a business’s financial situation can change quickly, updating your reports regularly is crucial.
Year-old financial reports serve little purpose unless you use them to assess business growth. For this reason, many businesses update their financial reports quarterly for internal use.
For external reports, check local and industry regulations to determine which financial reports you need to create and how often.
2. Run reports based on your yearly schedule
Some businesses run financial reports using the annual calendar from January to December, while others align reporting with their corporate calendar.
Some organisations, like educational institutions, have unique fiscal years, such as the school year. Consider what makes sense for your business and tailor your reporting schedule accordingly.
3. Prioritise transparency
Financial reports should be transparent and accurate, not just pretty pictures for investors or shareholders.
Ensure your reports are easy to read and understand. Clean and straightforward report organisation, clear labelling and transparent process explanations enhance report value.
4. Use financial reporting software
Creating financial reports manually is time-consuming and prone to errors. Given the amount of high-stakes information in a financial report, using financial reporting software makes the task easier, more reliable and more secure.
Simplify financial reporting with MYOB
With the MYOB business management platform, you can get insights and financial reporting across all our plans. Our accounting software minimises human error by pulling data from bank transactions, receipts, timesheets and more.
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Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.