Financial Reporting: The Meaning, Objectives, & Importance

Farwah Jafri | July 14 2022

A single thread that ties all business departments is accounting & finance. The finance department records and reports every business financial activity to executives and stakeholders, helping the decision-makers make timely and informed decisions, mitigate risks, and stay compliant.


What is Financial Reporting?

Financial reporting is an unavoidable chore every business must do to stay compliant with the industry regulations. Unlike common beliefs, financial reporting is not just about reporting finances and preparing cash flow & income statements and balance sheets.

Financial reporting also entails recording the monetary and non-monetary aspects of the business. Its objective is to keep the internal management and external stakeholders informed about the business’s financial health.

Simply put, it is the end product of accounting, and every process and activity relating to accounts culminates in financial reports. Most businesses create these reports at least once a year, while the ones serious about success do so more frequently.

In addition, both public and private companies prepare financial reports as it helps them identify strengths and weaknesses and lure investments.

Explore: 10 Cash Management Strategies that help you manage finances better and save more money.


What is the Objective of Financial Reporting?

Businesses report finances for a single-most-important reason, and that’s to depict a crystal-clear picture of their finances. The details included in these reports help the top-level executives plan, analyze, review, and decide.

These reports come in handy whenever a business needs to present its case in front of an investor, debt provider, or promoter. They are even more vital for public companies as it helps keep everyone updated about the current financial health of the business.

Financial reports help internal management assess how efficiently the business is running and whether or not it’s using the resources efficiently. Moreover, it also helps communicate to the shareholders how ethically the business is handling its fiduciary responsibilities.

In summary, the objective of financial reporting is to communicate details about finances to everyone involved in order to ensure the business move forward constructively. Not to forget, these reports help the business comply with industry standards and regulations as well.


Types of Financial Reports

There are three common types of financial reports every business must prepare regularly. These include the Balance Sheet, Income Statement, & Cash Flow Statement. In separate, these reports share one integral aspect of business finances. However, in tandem, they share everything management, shareholders, and investors need to know.


– Balance Sheets

The balance sheet provides a simple, understandable snapshot of a business’s liabilities, assets, and owner’s equity. If you want to know where your business stands, the sheet you need is the balance sheet. Besides this, it also shows how much the company is worth; the number every investor needs to know.


– Income Statements

Income statements entail the details about net gains and losses for a specific period. All the returns you get from business operations and activities go into this statement. Businesses usually prepare income statements every month.


– Cash Flow Statements

Cash flow statements illustrate the cash inflow and outflow by breaking down activities into two types. One type entails all activities that raise money, and the other includes the ones that cost money. In other words, the former shows the cash inflow and the latter cash outflow.

Furthermore, cash flow statements show how well your business is running and provides a crystal-clear view of its expenses and profits. These statements may also include the records of financing and investing activities.


The Importance of Financial Reporting

Financial reporting is instrumental to business longevity and success. It is hard to run a business without proper finances and up-to-date reports. Everyone from executives and investors to shareholders and employees needs these critical financial reports to do their work efficiently.

These reports help the business scale efficiently and grow effectively. They help identify troubles and risks early on so you can mitigate and resolve them promptly. In addition to perks like financial health assessment, investment assistance, recordkeeping, and the likes, financial reporting also helps businesses do the following:

– Regulate company policies and practices as per the law.

– Make audit simple and hassle-free.

– Highlight strengths and weaknesses.

– Make winning strategies and informed decisions.


How Can Monily Help You With Financial Reporting?

Not every Joe and Jane can create accurate financial reports. It is best to leave the task to the professionals who share expertise in financial reporting. Our bookkeepers and CFOs are skilled in helping businesses record and report their finances timely and accurately. As a result, you can make timely and informed decisions, stay compliant, and accelerate success.

Check This Blog Post And Learn: how outsourced bookkeeping works at Monily.

Author Bio

Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.