What is financial reporting?
Financial reporting is the accumulation, recording and presentation of precise and error-free records and statements of a company’s finances to an outside body, such as lenders and shareholders. These records include income, stockholder’s equity, expenses and revenue. Publicly traded companies will issue quarterly news releases, and announcements concerning earnings, financial reports and material events to federal regulatory agencies.
The purpose of reporting is to provide an in-depth and detailed account of how well a company is doing, specifically with regards to its finances and operations. As such, financial reports are salient to making smart and sound decisions with regards to your enterprise.
What are financial reporting requirements for private companies?
With the exception of filing tax returns, private companies don’t have to report their financial information to the government.
Private companies have no obligations to report results or ownership information because they are not issuing stock to the general public. Private companies can maintain confidentiality as they are in control of their own operations and have the freedom to make investment and operational decisions without the scrutiny of Wall Street investors.
Reporting obligations do not apply, such as, How much are you paying your executives? How much money did you make or lose? How many shares do executives, Board Members and investors hold in the company?
However, once a private company receives funding from experienced investors, reporting requirements will likely be established between the company and investors, even if the information doesn’t have to be shared with the general public.
There are also some government requirements stipulated by the Securities and Exchange Commission (SEC) for private companies to file financial reports. Specifically, a company with more than 750 common shareholders and $10M in assets. For companies of this size, a Form 10 must be filed. Form 10 is similar to the information contained in an IPO (Initial Public Offering). This document includes information about the business, its executives and operations. Once a Form 10 is filed, the company will have to issue quarterly and annual reports with the SEC.
Financial Reporting Objectives
There are benefits and advantages of robust financial reporting practices even when a company is not required to do so.
Debt can immobilize the development and advancement of a company. Financial reporting aids you in keeping tabs on your net income and liquidity. This way, you will be able to supervise your debt.
Positive and Negative
Once you track your finances, you will be able to identify patterns and certain inclinations – both positive and negative – in the business. Consequently, you will be able to point out and notice the things that need improvement in terms of how the company handles its finances. Recognizing first-hand any deficiencies will aid in the development of the company’s financial and overall performance.
Following your actual, real-time performance is an edge. Access to this means you can quickly nip problems in the bud. You will also be able to make smart decisions promptly, retaining your monetary fluidity as a result.
Liabilities and Governance
With financial reporting, you have a clear understanding of how much you owe and to whom. Good governance and accounting systems are important for attracting investors and lenders in anticipation of a public offering or liquidity event, such as an acquisition. Relationships with investors is aided in the communications provided by good financial reporting, too.
Financial Reporting Framework
The three principal financial reports are your balance sheets and income and cash flow statements.
What is a balance sheet?
Balance sheets are one of the essentials of a financial report. It gives a summary of a business’s total liabilities and assets, as well as their primary investors’ equity. As such, the balance sheet specifies how your company subsidizes its assets and investments.
Knowing the current revenue situation will affect the cash flow, whether the budget needs tightening or there is enough cash for investments. Likewise, keeping sight of projected revenues will be the basis for the possible allocation of money for product improvements or business expansion.
What is an income statement?
The income statements convey the summation of all expenditures, net revenue, and dividend for every share quarterly and yearly. A couple of years’ worth of data, usually less than five years, is shown to compare each year. As a result, income statements help check to see if the company is earning and managing their expenditures well.
What are cash flow statements?
Cash flow statements gauge the effectiveness of a business or enterprise to pay their financial obligations, create a budget for their expenditures, and pay for investments. As a result, the cash flow supplements the income statements and balance sheets.
Financial Reporting and Accounting
For small businesses and startups, preparing a financial report is vital to track your business’ progress. A financial statement is also an essential part of your business plan. Some essentials to get started include:
1. Constructing a Budget, including Working Capital and Positive Cash Flow
Before giving you the money, investors or lenders need to know more or less how much you will earn and spend per month. Here is where your budget plan comes in. With the aid of your outline, lending institutions will get to see if you can handle your money well and comply with your budget and not splurge. The budget plan will also show what your working capital is and the extent of time it will take for you to gain positive cash flow.
2. Create an Income Statement
Once you have constructed your monthly budget plan, you can start making your first year’s income statement. Your profit and loss or income statement conveys your earnings for the year and, more or less, how much tax you need to pay. As a result, your profit and loss statement will give you an idea of the amount of time it will take before you start earning from your business, tied to your break-even analysis.
3. Calculate Liabilities
Liabilities include all loan agreements. These, along with the shareholders’ equity represent your indebtedness. Compute and create the subtotal of current indebtedness. Afterward, create a column for fixed liabilities. By definition, these are those that need a lengthier time to be paid off (more than 12 months). These include pension plans, bonds, mortgages, and the like.
Equity is the summation of all investments and prior profits of the company owners, board members, and partners.The subtotal of current liabilities, fixed liabilities, and ownership will be added together to construct the summation of liabilities and equity.
Any other relevant information about sales, customers, churn, competitors, investments, research, market entry and market acceptance can add perspective and context to how well your business is performing.