Financial reports serve more than one purpose. Companies can use the information in these documents to make informed decisions about operations and strategies. Meanwhile, lenders and investors also want clear insights into the company's money management practices.
Financial documentation is also important for taxes and proving compliance with regulations. Public companies need to file annual and quarterly statements. These forms, known as Forms 10-K and 10-Q, show financial details to shareholders and regulators. Accuracy is very important because external auditors evaluate the forms’ accuracy, and errors could lead to costly penalties.
Here is a closer look at financial statements and methods for improving accuracy and efficiency when creating them.
What Is Financial Reporting?
Financial reporting is the process of creating statements that detail money management and fiscal performance. Managers and decision-makers read these statements — as do investors, creditors, and regulators.
Here are some common examples of financial statements.
- Income statements detail the revenue, profits, and losses. It also provides an overall summary of financial performance over the given period.
- Balance sheets add information about company assets, liabilities, debts, and shareholder equity.
- Cash flow statements show a company's income. It also looks at how it spends the available funds for investing, development, and payments.
Other types of financial statements detail specific aspects of company operations. For instance, larger companies release equity statements to show how much shareholders invested and received in dividends.
Some companies need such specialized reports. However, general financial reporting can help companies of all sizes with compliance and decision-making.
What Are the Benefits of Financial Reporting?
Accurate financial statements are vital for tax and reporting compliance. They also bring other benefits to companies. For example, records can help with strategic planning and management. They can also improve investor confidence, help the company highlight improvements, and help executives assess the financial impact of decisions or strategies.
Here is a closer look at three of the most important advantages of financial reporting.
1. Tax Liability Assessment
Companies can use financial statements to manage tax liabilities. Accurate income, sales, and cash flow details help document revenue and costs. These figures can affect taxes. For instance, certain types of spending or investment can potentially lower tax liability.
For some companies, the value of assets and equity can also affect tax payments. This happens if assets like equipment or fleet vehicles depreciate over time.
One of the biggest tax-related advantages of financial reporting is the ability to foresee liabilities. Companies can use income and asset data to calculate taxes. The same info can help avoid surprises by making forecasts about future tax payments.
Finally, accurate records allow for transparent communications with tax authorities. A company can point to specific financial data to support deduction or credit claims. The records can also prove cash flow and spending during an audit.
2. Financial Transparency
Accurate, unfiltered statements do more than show data to regulators — they also help company decision-makers understand the performance and status of a company. Reporting fuels business analysis because executives can see the potential financial impact of business decisions.
Reports can improve the effectiveness of planning because stakeholders use data to back up their decisions. They can use data to argue their points instead of relying on subjective opinions.
Finally, statements bring transparency to investors. Shareholders need clarity when it comes to the company’s performance. With transparent reports, they may feel more confident in its long-term potential. A lack of transparency in financial reporting can have the opposite effect. Investors might suspect problems and sell their position, causing wild stock price fluctuations.
3. Error Reduction
Financial statements require standardized practices for recording financial data. These methods can improve the accuracy of bookkeeping and accounting operations. For instance, accountants compile financial statements using double-entry principles. Each entry on one account corresponds with an opposite entry in another account. This balancing check highlights mistakes and allows for easy cash flow tracking.
Inaccurate statements can lead to financial issues for a business. These may include poorly informed decisions, spending or cash flow problems, penalties for non-compliance with tax or reporting laws, and a loss of investor trust. Audits may also be more time-consuming and costly as auditors work to find the source of errors.
Companies can avoid these problems with good bookkeeping principles and capable technology. The use of automation can help record financial data and populate financial reports while limiting human error.
How To Make Sure Your Financial Statements Are Accurate And Complete
Financial statements only provide the desired benefits if they are accurate. Errors can complicate analysis and harm compliance efforts. Meanwhile, industry-specific details and data can improve financial reporting and bring helpful insights.
Here is a closer look at the steps necessary to create complete financial statements.
Tailor Your Reporting To Your Industry
Companies in different industries may have differing reporting needs. For instance, sales tax can be a complicating factor for retail companies. Also, manufacturing companies may need to calculate equipment valuations for their balance sheets.
Companies need to tailor their recordkeeping and reporting processes to focus on the specific areas that are most important. These approaches can be especially useful for companies that use statements internally to analyze financial performance with key performance indicators (KPIs).
Service-oriented businesses like law firms, for example, focus on specific ratios to compare operating costs and revenue to other variables. These KPIs could include the following.
- The ratio of production labor to revenue measures the staff’s efficiency when delivering legal services by comparing labor costs with revenue.
- The ratio of total labor to revenue adds non-legal work, such as administrative and marketing wages, into the equation to show the efficiency of the entire staff.
- The ratio of marketing costs to revenue gauges the effectiveness of ads and other client acquisition efforts by comparing costs to overall revenue.
- The ratio of sales costs to revenue looks at the effectiveness of sales efforts. A low ratio of sales costs to revenue indicates effective sales strategies.
- Months of operating costs in cash predicts how long a firm can continue to operate using only its cash reserves.
As with many industries, the legal sector requires specialized bookkeeping expertise. Accountants with legal knowledge can offer reports and insights into profits and financial performance using KPIs specific to the legal sector. Such law firm bookkeeping and accounting services can offer more accurate insights than general bookkeeping and financial reporting software.
Law firms also need industry-specific expertise for reporting requirements. For instance, Interest on Lawyers' Trust Account (IOLTA) reporting is necessary for accounts that hold client funds. Reporting for these accounts needs to meet specific state bar standards. To do this, firms need experts who understand these requirements and can ensure compliance.
Track Relevant Data Consistently
The same insights available via quarterly and annual financial reports can also help with assessments and KPI tracking on an ongoing basis.
A law firm can continuously track billable hours and expenses to measure performance. These frequent insights can be especially useful for small and medium-sized firms. These businesses need to carefully track revenue and measure net income. This data can help with decisions about accepting cases, adjusting billing, or managing employee hours.
Today’s bookkeeping software options offer automated solutions that can provide these real-time insights.
Utilize Digital Tools for Automation
Finally, software can be a helpful tool in maintaining accuracy by automating the bookkeeping process. Automation can streamline collecting invoice and payment data and populating bookkeeping records and financial statements.
Digitized systems allow insights into financial status at any given time without requiring decision-makers to wait for infrequent financial reports. Also, automatic accuracy checks lower the chances of human error when entering data or making calculations.
With the correct tools and a comprehensive plan for creating financial statements, a company can comply with reporting and tax regulations and give company stakeholders the financial data they need to make informed decisions.