What is financial reporting?

A company’s financial planning and analysis (FP&A) team uses financial reporting to maintain organized accounting data, track current liabilities and to paint a clear picture of its financial status. Financial reports are also crucial for profitability projections, financial forecasting and compliance, no matter what the industry or function might be.

Companies are integrating financial reporting software to improve accuracy through real-time analytics and enable data-driven decision-making. Software that implements advanced technologies like artificial intelligence (AI) and machine learning (ML) can automate processes and streamline tedious reporting tasks, while securely storing financial information.

Financial reporting is a crucial accounting process for companies of all sizes. A financial report, along with its associated components, provides a clear view into the company’s financial health.

A key objective for financial reporting is having documentation of all income/expenses or the cost of sold goods that are coming in and out of a company.

This process is necessary for effective debt management and helps stakeholders with budget allocation and spending decisions. The process gives a company the documentation to track liabilities and assets, helping ensure transparency and accuracy.

Depending on the industry, companies have varying compliance requirements and laws. Most have at least one stakeholder that requires periodic financial reporting.

Public companies must comply with the Securities and Exchange Commission (SEC) filing requirements, Financial Accounting Standards Board (FASB), Generally Accepted Accounting Principles (GAAP) standards and auditing requirements of the Sarbanes-Oxley (SOX) Act. The Internal Revenue Service (IRS) legally requires financial reporting and failure to comply can lead to serious consequences.

Financial reporting is foundational to internal management, such as following business performance management practices, measuring KPIs and calculating employee compensation. The process supports accountability and provides real-time data to the individuals within the company who are making strategic decisions.

With modern financial reporting software, companies can develop data models, financial analysis and financial modeling to help evaluate current activity levels and drive more long-term growth.

A potential stakeholder, such as an investor or partner, will turn to financial reports from a company to decide whether they want to do business with it or not. Financial reports are critical to the company because it is continuously being evaluated.

A business can produce a multitude of reports or types of financial statements (also known as financial disclosures) to compile financial reporting, each having its own purpose. They are strongest when put together in a reporting package or used for internal reporting in dashboards.

• Balance sheet: A balance sheet is a core financial statement used to evaluate a business’s financial position. It shows what a company owns (assets), what it owes (liabilities) and shareholder equity. A business typically tracks a balance sheet quarterly and they can be included in annual reports. The balance sheet also gives stakeholders a real-time assessment of the company’s current financial state and can help determine its net worth.

• Income statement: An income statement, also known as a profit and loss (P&L) statement, shows a company’s performance by laying out revenue, expenses, net income, gains and losses during a specific time frame. The profit and loss statement provides valuable insight into how well a company is operating and managing relative to industry competitors.

• Cash flow statement: A cash flow statement is a summary of how money flows in and out of a company over a specific period of time. The statement shows where cash is received and disbursed through operating activities, financing activities and investments. The cash flow statement is essential to understanding the financial health of a company and helping potential investors gauge the company’s overall stability.

• Statement of shareholder equity: A statement of shareholder equity, typically a section of a business’s balance sheet, explains how business ownership has changed over time. It’s a statement of a company’s net worth or retained earnings and it reports the changes in shareholders’ equity after all debts are paid. It helps indicate financial health and is used by individuals both externally and internally.

• Financial dashboard: A financial dashboard is for internal reporting purposes. The dashboard is a digital tool that displays an organization’s financial data in a readable way. Modern financial systems have gotten more complex, requiring large amounts of data to organize and maintain. A financial dashboard can simplify the data through charts and graphs to help stakeholders make faster business decisions.

• CFO dashboard: A chief financial officer (CFO) dashboard is a role-based financial dashboard specific to the needs of a finance leader. The CFO dashboard consolidates key financial data and KPIs from across a company’s systems, like enterprise resource planning (ERP) and other accounting software. Typical reporting might be accounts receivable, accounts payable turnover and payroll data.

The financial reporting process is a crucial component of the success of a company. While legal requirements and compliance must be satisfied, financial reports also provide the following benefits:

The requirements for financial reporting are frequently changing and will depend on the company and whether it’s public or privately owned. The most common standard setters are the Financial Accounting Standards Board, the International Accounting Standards Board and the Government Accounting Standards Board. The standards are always shifting and being tweaked for accuracy and usefulness.

The Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS) often update their rules to align with those tweaks from the standards boards and to reflect the current economic climate. Outside of the United States, companies abide by International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board.

Privately owned companies have fewer external financial reporting requirements but are still required to file tax estimates and do annual tax returns with the IRS. Smaller private companies will face specific financial reporting needs depending on the lenders used, but they should always have strong financial management processes in place.

Transparency is key for private companies and releasing financial reports or investing activity voluntarily can be a marketing tactic used to build interest.

In contrast, the SEC not only requires strict financial reporting from public companies, but also monitors them. Financial reporting requirements from the SEC are lengthy, but the most common include the quarterly 10-Q, the annual 10-K and the 8-K for reporting unscheduled events. There are many other requirements depending on the provision and circumstance.

Financial reports can be used in various ways for both internal and external stakeholders. Through financial reporting, a company can tell its story and help investors understand its current health and valuation.

This type of financial reporting communicates a company’s financial information to stakeholders as a way to evaluate the overall health and viability of the company. Some of the primary use cases include:

• Regulatory compliance: A company must follow regulatory standards set by the SEC and follow frameworks like the US Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

• Investors: Financial statements are beneficial to current and potential investors who are assessing a company’s performance.

• Lenders and creditors: A financial report is used by banks and other lenders to evaluate a company’s loan application and lines of credit and verify creditworthiness.

• Business partners: A company that puts out financial reports provides transparency and builds trust with business partners such as suppliers, customers and investors.

• Mergers and acquisitions (M&A): Having clear financial reports are crucial during M&A activity as stakeholders are evaluating a potential deal.

Financial reports are key to internal management and performance analysis. Internal financial reporting use cases vary depending on the company, but all drive toward a common goal of staying agile and strengthening strategic operations:

• Performance analysis: A company’s internal management team can use reports to analyze profitability by department or product line and to measure key performance indicators (KPIs).

• Budgets and forecasts: Financial data is indispensable for companies looking to achieve both short-term and long-term goals, particularly in developing budgets and building financial forecasts.

• Cash flow: By monitoring the cash flowing in and out, a business can manage its liquidity and optimize its working capital decisions and manage debt.

• Risk management: Financial reporting analysis can help companies proactively mitigate potential business risks and monitor market challenges.

• Operational optimization: Financial reports help teams identify trends and detect business inefficiencies, leading to better decisions regarding expansion or reduction.

New technologies fueled by business process automation and generative AI in finance are changing the traditional financial reporting process. These advanced tools have introduced new use cases for financial reporting that showcase efficiency and advanced analytics.

• Automated reporting: AI in FP&A tools can pull vast amounts of data from across an organization and consolidate it into a secure platform, helping ensure accurate financial tracking and instant updates.

• Real-time dashboards: Modern financial reporting software can create live dashboards with key metrics in real-time, including immediate views of cash flow, revenue and expenses.

• Predictive analytics: Some AI model software goes beyond the traditional automation processes by using historical data and market indicators to fuel predictive AI models and predictive analytics. This process leads to instant scenario planning and trend predictions.

• Enhanced fraud detection: Machine learning (ML) models can track transaction patterns and automatically signal unusual activity, leading to proactive fraud mitigation tactics and strategies.