In this article, learn what is financial reporting and why it matters to your business’s regular operations and compliance.

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What is financial reporting?

Financial reporting is the process of documenting your business’s financial information and performance using financial statements. It aims to provide external stakeholders with accurate information about your financial performance to ensure you’re compliant with all applicable accounting standards. 

How often you need to prepare your financial reports depends on the information you need to get, as specified below:

Reviewing your financial reports regularly keeps you posted on your business performance. If possible, review your resources daily, weekly, monthly, quarterly, and yearly.

  • Daily: Track the previous day’s business activities and their impact on your overall financial standing.
  • Weekly: Analyse short-term sales performance and business expenses.
  • Monthly: Get a clear overview of the previous month’s financial performance to help decision-makers identify areas to focus on. 
  • Quarterly: Prepare for compliance submissions and quarterly planning.
  • Annually: Use to prepare financial statements, annual plans and tax returns.

 

Why is financial reporting important?

Preparing and lodging your financial reports is a key business activity due to the following reasons:

  • Keeps your business compliant with accounting and reporting standards

Financial reports are often used for compliance. Regulatory bodies, such as ATO and ASIC, require businesses to lodge financial reports to check if they follow all relevant accounting and reporting standards. 

  • Helps in financing your business

Financial reports give your stakeholders and investors an accurate, timely, and reliable view of your finances. This includes your cash flow, capital, expenses, profits, revenues, and other information that affects your operations. Such documents also show how you reinvest the cash into the business and how effectively you use capital.

Other external users like banks consult these reports to see if you’re eligible for loans, investments, lines of credit and business grants.

  • Simplifies your taxes

When lodging tax returns, you need to state how much income you earn for a certain period and if you’re claiming any deductions. If you do financial reporting regularly, you can simply refer to your income statement to get the information you need in completing your tax returns.

  • Ensures financial transparency

Financial reporting is crucial for understanding your cash flow. It gives you an idea of how much money you have, where it comes from and where it goes. At the same time, it also shows how well your business performs and if it’s capable of sustaining long-term growth.

 

4 types of financial statements

The four common types of financial statements you need for financial reporting are:

  • Profit and loss statement (income statement)

Your profit and loss (P&L) statement shows how much money your business makes minus the expenses. This financial statement is useful for developing sales targets and appropriate pricing strategies.

To set up your P&L Statement, check out this guide: How to set up a profit and loss statement

  • Balance sheet

The balance sheet contains information on these three important components: assets, liabilities and equity. It shows you a clear overview of your business’s financial health over a specific period.

  • Cash flow statement

The cash flow statement tells how much money goes in and out of your business and whether you have enough liquid assets to remain operational. It’s also useful in spotting seasonal trends and payment cycles. The information presented in your cash flow statement can help you plan ahead and ensure you have enough cash to cover payments.

  • Statement of changes in equity (Statement of retained earnings) 

Also called the statement of retained earnings, the statement of changes in equity refers to the financial statement that measures how much an owner’s equity changed during a certain accounting period.

Aside from these 4 key reports, the Australian Securities and Investments Commission (ASIC) also mentioned other reports such as directors’ declarations, directors’ reports and the auditor’s report.

 

How does financial reporting differ from management reporting?

Financial reporting differs from management reporting, as shown below:

  • Financial reports are for compliance. It’s a mandatory requirement for businesses. External users like banks, investors and regulators (ATO, ASIC) often consult these documents to approve loans and see if you’re following the relevant accounting and reporting standards.
  • Management reports, meanwhile, are for decision-making. It’s not a mandatory requirement, but a must-have document for key decision-makers. Management reports dig deeper into specific areas of your business and give you actionable insights to guide your decisions.

The common denominator between the two is to provide accurate, timely, and reliable financial information to internal and external key stakeholders.

 

Prepare accurate financial reports

Keeping accurate financial reports regularly lets you see where you need to improve. It also helps you devise strategies to improve your business performance over time. Most importantly, it helps you stay compliant with all applicable laws and regulations.

ABJ Solutions provides timely and accurate financial reporting to Australian businesses. We use cloud accounting software and business intelligence applications to work smart, enabling us not only to be efficient in preparing your financial reports but also to guarantee your numbers’ accuracy.

Learn more about our financial and management reporting services by visiting our website. You can also contact our experts to get a comprehensive idea of how we can help you improve your accounting processes.