Financial reporting is an essential process for businesses of all sizes. By tracking, analyzing, and reporting a business’ results, the key stakeholders can make smart decisions about how to manage their business, including allocating resources and managing cash flow.
“Financial Reporting” is a broad term that encompasses a number of different types of documents, including a company’s financial statements. To put it simply, all financial statements are considered financial reports, but not all financial reports are financial statements.
In this article, we will delve into the best practices for financial reporting and analysis, and how companies can shift from a reactive to a proactive approach. Additionally, we will explore the crucial role of budgeting and strategic planning in achieving financial success and staying on track with business goals.
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What is Financial Reporting and Analysis?
Financial reporting and analysis is the practice of gathering and evaluating financial data to assess a business’ performance. This process provides insight into a company’s revenue, expenses, assets, liabilities, and equity. Financial reports offer a comprehensive view of a business’ financial health, enabling decision-makers to address the health and progress of the business.
What Does Financial Reporting Include?
Financial reporting typically includes:
Monthly, Quarterly, and Annual Reports, which include the income statement, balance sheet, and cash flow statement. These financial reports provide an overview of an organization’s financial performance over a specified timeframe.
A/R and A/P Reports, which contain data about invoicing and accounts payable including aging (how long you are taking to collect revenue or pay vendors). These reports can include metrics and KPIs.
Periodic Analysis. It is important to do periodic deep dives into your operations. This may include inventory audits, gross margin and/or gross profit analysis (by market, product, service line, etc.), compensation analysis, headcount analysis, or utilization analysis.
Let’s take a look at how business owners can improve their financial reporting process.
The Best Practices For Financial Reporting and Analysis
1.Know The Financial Reports That Are Essential to Your Business
For many business owners, it can be overwhelming to know which financial reports to focus on. Additional volume of reporting does not equal improved understanding. Getting a 50-page financial report does little to help a busy executive understand their business. So, let’s break down the most important financial reports that every business owner or CEO should be aware of, and how they can help you make smarter decisions for your company’s growth and success.
The five most important and commonly referenced financial reports are:
- Income statement
- Balance sheet
- Statement of cash flows
- AR aging report
- Budget vs actual
Income Statement
An income statement, also known as a profit and loss statement, is a financial document that summarizes a company’s revenue, expenses, and profits over a specific period of time. The income statement is used to measure a company’s financial performance.
Balance Sheet
A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It lists the company’s assets, liabilities, and equity and shows how these elements are related to each other: Assets = Liabilities + Equity. The balance sheet is used to assess the company’s financial strength and stability, as well as its ability to pay debts and meet obligations.
Statement of Cash Flows
A statement of cash flows is a financial statement that provides information about a company’s cash inflows and outflows over a specific period of time, typically a month or a quarter. The statement of cash flows is used to understand how a company is generating and using cash, which is critical for its short-term liquidity and financial stability.
AR Aging Report
An aging report, also known as an accounts receivable aging report, is a financial document that shows how long it takes for a company to collect payment from its customers. The aging report categorizes the company’s accounts receivable into different aging buckets, such as 0-30 days, 31-60 days, 61-90 days, and over 90 days, and provides a summary of the amount of money the company is owed in each category.
The aging report is used to manage the accounts receivable process and to assess the risk of bad debt. By analyzing the aging report, a company can identify which customers are paying on time and which ones are falling behind, allowing it to take appropriate action to improve cash flow and reduce the risk of bad debt.
Budget vs Actual
Budget versus actual reporting, also known as budget variance analysis, is a financial management tool that compares a company’s actual financial performance to its budgeted or planned performance. The objective of budget versus actual reporting is to identify variances or differences between actual results and budgeted or planned results and to analyze the causes of these variances.
Budget versus actual reporting typically includes the following elements:
- Budget or planned results: This is the amount of revenue, expenses, and other financial results that the company planned to achieve during a specific period of time.
- Actual results: This is the actual amount of revenue, expenses, and other financial results that the company achieved during the same period of time as the budget.
- Variance analysis: This is the process of comparing the budgeted or planned results to the actual results to identify variances and analyze the causes of these variances. Variance analysis helps the company understand why its results were different from its expectations and provides information for making adjustments and improvements.
Budget versus actual reporting is an important management tool for monitoring the financial performance of a company and making informed decisions about budgeting, forecasting, and resource allocation. By analyzing budget variances, a company can identify trends, improve planning and budgeting processes, and make informed decisions to improve its financial results. Together, these financial reports are essential for managing the business.
Ensuring that the data from financial reports is accurate is essential for business owners to make smart decisions about the direction of the company. If financial reports are not providing actionable insights, companies like Signature Analytics can help to determine what needs to be improved in accounting and financial reporting.
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2.Implement GAAP Accounting Principles
GAAP stands for Generally Accepted Accounting Principles. It is a set of guidelines and rules widely used as a framework for financial reporting in the United States, providing a common set of standards for entities to prepare and present their financial information in a consistent and transparent manner. These principles are established by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).
GAAP accounting principles include:
- Historical cost principle: Assets and liabilities are recorded at their original cost.
- Full disclosure principle: All relevant and material information should be disclosed in the financial statements.
- Matching principle: Expenses should be matched with revenues in the period in which they were incurred.
- Revenue recognition principle: Revenue should be recognized when earned, regardless of when payment is received.
- Objectivity principle: Financial statements should be based on objective evidence.
- Consistency principle: Companies should use the same accounting methods from one period to the next.
- Conservatism principle: In case of uncertainty, the financial statement should reflect the worst-case scenario.
- Materiality principle: Only information that is significant enough to affect the decisions of users should be included in the financial statements.
- Fair presentation principle: Financial statements should be presented in a way that is not misleading.
- Cost-benefit principle: The benefits of providing information should outweigh the costs.
By following these principles, GAAP aims to ensure that financial statements are consistent, comparable, and reliable, which can help users make smarter decisions about the financial health of a company.
The process of managing financial reports is not easy for most small and mid-size business owners – especially when it’s necessary to do it accurately on a consistent basis. If you need assistance in managing financial statements to ensure they adhere to GAAP, contact us today.
3. Follow the Four C’s of Good Data
Another best practice for financial reporting is to ensure that the data used for reports is accurate and timely. This means that the data is correct, current, complete, and consistent (the 4 c’s). By ensuring that the data meets the 4 c’s, businesses can ensure that their financial reports are reliable, which can increase credibility and trust among stakeholders. Furthermore, errors and inaccuracies in financial reports can lead to poor decision-making and costly mistakes.
It is essential to have a process in place to verify and validate data before it is used in financial reports. This can be accomplished by implementing a data governance framework, which includes data quality checks, data audits, and data validation. This process will help to ensure that the data is accurate, complete, and consistent, and will help to improve the overall quality of financial reporting.
Use of technology to streamline the reporting process
By using technology to streamline the financial reporting process, companies can improve the 4 c’s of their financial reporting. A company can use technology to streamline the financial reporting process in the following ways:
- Automate data collection and entry: Using financial management software to automate the collection and entry of financial data can reduce the risk of errors and save time.
- Real-time reporting: Advanced technology solutions can provide real-time financial reporting, allowing companies to make informed decisions quickly.
- Data visualization: Technology can help companies present financial data in a clear and visually appealing way, making it easier to understand and analyze.
- Cloud-based solutions: Cloud-based financial management systems allow for secure access to financial data from any location on various devises, making it easier for teams to collaborate and share information.
- Integration with other systems: Integrating financial reporting systems with other business systems, such as sales and purchasing systems, can provide a more comprehensive view of the company’s financial position and reduce double entry. Again reducing the risk of errors and saving time.
Keep Processes Simple and Consistent
By reducing process complexity, businesses can improve the 4 c’s of their financial reports, which ultimately helps to make informed decisions about the financial health of the business.
Processes should be documented to ensure consistency, understanding, and efficiency. Documenting processes provides a clear and consistent understanding of how tasks are to be performed, reducing the likelihood of misunderstandings and errors. Once processes are documented, then a company can move to process improvement.
Process improvement is an important best practice for financial reporting. A complex process can lead to errors and delays, making it difficult to produce accurate and timely financial reports. To reduce process complexity, businesses can take several steps such as simplifying the data collection and analysis process.
This can be done by reviewing the current process, identifying areas of inefficiency, and simplifying or eliminating those steps.
4. Establish Monitoring and Reporting Frequency to Ensure Accurate and Useful Financial Reports
Accounting management establishes a consistent monitoring and reporting frequency for accurate financial reporting. This includes setting regular intervals for recording financial transactions, such as daily or weekly, and for compiling and analyzing financial data, such as monthly or quarterly. By doing so, business owners can have confidence that their financial records are accurate and up to date, which in turn allows for more effective decision-making and forecasting.
Additionally, setting a regular reporting frequency helps to identify trends and patterns in financial performance, and can aid in identifying potential issues or areas for improvement.
5. Implement Performance Analysis and Benchmarking
Performance analysis is the process of evaluating the performance of an organization, business unit, product, etc. The goal of performance analysis is to identify areas of strength and weakness and to understand how performance can be improved. Performance analysis typically involves gathering data, analyzing the data, and presenting the results in a meaningful way.
Benchmarking, on the other hand, is the process of comparing the performance of an organization, business unit, product, etc. against standards of excellence or best practices within the industry. Benchmarking provides a way to measure performance against a standard, and to identify areas where improvements can be made. Benchmarking can be used to evaluate a variety of factors, including cost, quality, productivity, and customer satisfaction.
Performance analysis and benchmarking are often used together to provide a comprehensive view of performance and to identify areas for improvement. By comparing performance against industry standards and best practices, companies can make informed decisions about their operations and strategy, and improve their overall performance.
In addition, regular performance analysis and benchmarking allows companies to monitor their progress over time, making it easier to track their performance and identify areas where they need to improve. This leads to increased accountability within the organization.
6. Create Clear Summaries and Explanations
For busy company leaders, it is important that the financial reports that are received provide valuable insights that aid in decision-making. Creating clear summaries and financial analysis is essential for financial reporting. Accounting and financial leadership should present the most important data in a simple and direct way, using clear and concise language, providing summaries at the start of the report, and using charts, tables, and graphs to present key data.
It is also important for accounting and financial leadership to explain any data or figures in the report to help company leaders understand the context and significance of the information. This way, stakeholders can understand and use the financial reports effectively, which helps in making informed decisions about the financial health of the business.
In Summary
Financial reporting and analysis is a crucial process for businesses of all sizes to track, analyze, and report their financial performance. By understanding the importance of budgeting and strategic planning, as well as the key financial reports and statements, business owners can shift from a reactive to a proactive approach and make informed decisions about managing the business.
About Signature Analytics
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We customize the right solution for your business to get you the Accurate, Relevant, and Timely (ART) financials you need to run your business successfully. Contact our team of experts for expert accounting and financial analysis.
