Proper financial analysis and reporting are at the core of every successful business. They give businesses insight into important metrics instrumental to their growth. What’s more, the latter is a requirement by law in most countries, including the US, under the GAAP.
Most companies understand the surface importance of financial analysis; few know its potential. In today’s data-driven business landscape, those with proper financial analysis stay ahead. Plus, with many financial analysis tools, financial reporting and analysis is a breeze.
Today, we’ll look at why financial analysis and reporting are vital for all businesses. Let’s jump straight into it.
What Is Financial Reporting and Analysis?
Financial reporting is the collection and analysis of a company’s financial statements. This gives stakeholders an accurate picture of its financial position. It’s standard financial practice and a legal requirement in most countries.
Financial reporting culminates in a financial report. This report details how much money the company has, where it’s from, and where it needs to go. The report is crucial for policy formulation and making critical business decisions.
Financial analysis is the process companies use to evaluate their financial information. To do so, companies use essential metrics known as key performance indicators or KPIs. Some of these key performance indicators include:
- Profit margins
- Revenue growth
- Client retention
- Customer retentions
You may already be familiar with these metrics because you use them every day. They’re essential for gauging and improving your company’s financial performance. However, in accounting, these metrics depict the company’s overall financial health.
Back in the day, company’s had to do their financial analysis and reporting manually. These days, technology has made financial reporting and analysis a walk in the park.
Companies use financial reporting software with data analysis tools like Workiva. This helps them generate accurate financial reports.
All you have to do is feed in data from your financial statements and make minor adjustments. The software will do the rest. Examples of financial statements you can use in your financial analysis include:-
Balance sheets: You’re familiar with them and have used them a couple of times. Balance sheets compare your assets and liabilities. Although they give vital information, they don’t show everything.
Balance sheets might not accurately delineate the current financial situation. As such, you must combined data from balance sheets with data from other sources. That way, you’ll get a conclusive depiction of your financial situation.
Income statements: This measure your companies profitability over a set period. They compare cash inflow to how much you invested to calculate the profit you made.
Cash flow statements: These tell you how much money flows in and goes out of your business. It depicts how well you manage your company’s cash flow.
There are a few examples of financial statements companies use in financial analysis. The building blocks of these statements are the KPIs that we talked about earlier. Now let’s find out why financial reporting and analysis are essential for your business.
Why Are Financial Analysis and Reporting So Important?
Financial reporting and analysis help you better understand your company’s financial situation. This makes for better and well-informed strategic decisions. While it’s easy to overlook the importance of these financial operations, it’s hard to understate their significance.
That said, here are a couple of reasons why financial reporting and analysis are so important.
Helps You Manage Debt Better
Financial statement analyses help business owners and executives manage debt better. It gives a clear picture of the company’s current financial situation and highlights outstanding financial obligations. These financial obligations include debts and accounts payable.
Improper debt management could run your business to the ground, especially if you have the wrong picture of your company’s financial situation. Financial analysis keeps track of your assets and liabilities to maintain the perfect balance. It also ensures that all revenue-generating processes are in check to pay off all debts.
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Improves Cash Flow Management
You’d think that only large businesses have cash flow problems, but a surprising 82% of small businesses crumble due to cash flow issues. Keeping track of KPIs is essential for proper cash flow management. Financial reporting and analysis allow you to keep track of your KPIs to ensure effective cash flow management.
You can also use the KPIs to optimize your revenue streams and eliminate your liabilities. You can also use data from the report to formulate a strategy to cushion you against unexpected events. This ensures you have enough to maintain a steady cash flow even in dire situations.
It Provides Information for Public Investors
Potential public investors need to know a company’s financial situation before they can invest in it. Financial analysis and reporting simplify essential financial information so the company can disseminate it to the public. It makes it easier for potential investors to invest in your company and also attracts the right investors.
The financial report shows where the company’s financial standing and its growth potential. It’s all the public investors need to know whether the company is a worthy investment.
Streamlines the Decision-Making Process
Financial reports give insights into consumer trends, potential pitfalls, and the general business environment. These help you make better financial decisions and propel your company to greater heights. It also allows you to provide information on-demand to investors, executives, and local authorities.
Allows Real-Time Data Analyses
Financial analysis and subsequent reports allow access to data in real-time for immediate data analyses. This data helps you generate forecasts, data models, and reports for better decision-making. You can act quickly when opportunities arise to stay ahead of your competition.
Simplifies Paying and Filing Taxes
Paying taxes is not the most exciting part of owning a business, but failing to do so is illegal. Filing and paying taxes can get overly complicated, especially for large companies. The IRS uses financial reports to calculate how much of a company’s income is taxable.
Without financial analysis and reporting, filing taxes would be extremely complicated. Plus, you’d probably make a lot of errors which would put you at loggerheads with uncle Sam.
As mentioned earlier, government agencies like SEC and the IRS require an annual financial report. Violating GAAP requirements may have costly reparations. The SEC has instituted steep fines for GAAP ramifications.
Failing to provide your financial statements is a blatant GAAP violation. Inaccurate or false financial reporting is also a violation. Proper financial reporting and analysis ensure you’re fully compliant with the laws and regulations that various government agencies stipulate.
Ensures Financial Transparency
Being transparent about your finances makes your business attractive to potential external investors. That’s because investors want to understand a company’s financial situation before pouring money into it. As mentioned earlier, financial reports will give them all the information they need.
Enhances Communication and Collaboration
Financial analysis and reporting put critical financial data at your fingertips. This facilitates the seamless sharing of information across departments and institutions. It also allows you to collaborate effectively with investors, creditors and form solid relationships with potential partners.
Every business has its fair share of risks. However, prudent financial decisions can help you sidestep these risks. Here are a few ways financial analysis and reporting can help you mitigate risk:
- Improves data security and optimizes cash flow management to reduce the probability of financial fraud
- Uses analytic tools to predict any imminent market changes or supply chain disruptions to take appropriate steps
- Allows strategic business decisions that premise on actual data, unlike the traditional hit-or-miss approach
- Highlights any inefficiencies, pitfalls, and loopholes in your business processes to avert risks
This shows how important financial reports are in avoiding risks and reducing risk exposure.
Streamlines the Supply Process
Businesses that build concrete relationships with vendors rarely go down even when times get tough. That’s because the businesses’ reputation precedes them. Suppliers know that the business will make timely payments or will never miss payments because they never do.
Paying vendors on time or even early is always great for creating a good name with them. However, you have to balance these payments with the money flowing into your business. Making early payments may compromise your business’s liquidity and work to your detriment.
Financial analysis helps monitor cash flow, so you always have enough to pay your vendors. It also keeps track of customer trends to avoid overstocking and throwing money down the drain; for perishable goods.
Financial Analysis and Reporting for a Better Business
Financial analysis and reporting are not only necessary for compliance but also for growing your business. Leverage the available data analysis and financial reporting tools to make the most of financial reporting and analysis. Of course, you can always look for a finance company if you need help with financial reporting.
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