According to the UN organization, every year, a special day (June 27th) is set aside to celebrate micro, small and medium-sized businesses to highlight their enormous contributions (MSMEs) to the achievement of the United Nations Sustainable Development Goals (SDGs) and also their tremendous capacity to improve the world.
SMEs are seen to be the backbone of the global society and running a small business can be complex. Accurate financial reporting is crucial for managing, organizing, and understanding the finances of a small business.
One of the most frequent mistakes made by small business owners and one of the primary causes of small businesses failing is the failure to keep correct financial records. The success of a business is greatly influenced by the information disclosed by good financial reporting.
In this article, financial reporting will be covered from the bottom up, including its definition, the financial information it typically covers, and the benefits.
What is Financial Reporting?
A Financial report is a statement that discloses a company’s financial information and performance over a particular period, say quarterly, bi-annual, or annually. It aids in your understanding of your financial situation, including how much money you have, where it comes from, and where it needs to go. The financial report is like a medical report that gives you an overview of your business’ financial health.
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To accurately portray a company’s financial situation, financial reporting must adhere to accepted accounting principles, such as:
- Profit or Loss
- Assets and Liabilities (Third-party owing in the business)
There are three key financial statements you need to know as a small business owner. These financial statements are found in the financial report. They are the Income Statement, Balance Sheet (Statement of Financial Position), and Statement of Cashflow.
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- Income Statement: A company’s revenue, costs, and profits are summed up in an income statement, sometimes referred to as the profit and loss statement. The income statement effectively calculates a business’ net profit (Revenue less cost) by displaying how much the company made or lost during a specific period.
- Balance Sheet: A balance sheet provides a picture of the assets, liabilities, and shareholders’ equity/capital of a business at a certain point in time. This statement helps show the financial position of the company where the assets are equal to liabilities plus equities.
ASSET = LIABILITIES + EQUITY
Asset: Any valuable item that your business holds, including machinery, real estate, structures, and intellectual property, is referred to as an asset. Examples: Cash, Account Receivable, Equipment, and Inventory
Liability: Liabilities include all outstanding obligations, including bank loans, mortgages, unpaid accounts, and other amounts owed to third parties.
Equity: Equity is the amount of capital invested or owned by the owner of a company.
- Statement of Cashflow: It shows the movement of money in and out of a company. It helps business owners understand how much money a company is making and spending.
Benefits of Financial Reporting
A depiction of a company’s true financial situation is necessary for any business or company. The significance of a firm’s financial statements is best understood when the company tries to draw in new investors. Financial reports are necessary for many purposes and generally accepted accounting principles, in addition to being essential for management and investors to evaluate a company’s financial soundness. The following are the main benefits of financial reporting for small businesses:
1. Better Decision Making
Financial reports give business owners the ability to see patterns, and possible problems, and keep a close eye on their cash flow in real-time. Keeping track of your financial statements will provide you with the framework required to make rapid and wise financial decisions as needed. You won’t be able to make the crucial decisions—the majority of which will probably have an impact on how you do business—with objectivity if your financial reports are not accurate.
2. Industry Compliance
An accurate financial report guarantees that your business is compliant with the law and regulations required by government agencies. Government agencies ensure that the business follows all laws, regulations, and ethical standards. What if the numbers in your financial accounts don’t match up or seem off? You may be penalized which in turn would affect your business. Hence, an accurate financial report will save you all this stress.
3. Trust and Financial Transparency
Small business has been sourced and estimated to grow organically and this will give a good financial reporting system to the business. It takes more than an income statement or balance sheet to show how well a business is doing. Many businesses have been built on creative accounting thereby hiding their losses. Before making a formal investment, external stakeholders must investigate the financial health of the organization. Building confidence with potential investors and creditors through financial reporting is a fantastic approach to demonstrating a business’s financial transparency. Accurate financial reporting helps build trust among investors, clients, customers, suppliers, lenders, and other users of financial information.
4. Debt Management
A company’s capacity to control debt depends on its financial reporting. Financial statements provide you with information about the history and present of your company so you may make future plans.
5. Financial planning
Business owners can use a financial report to review past spending and make modifications for the future as well as to prepare for urgent expenses. Without the need for emergency credit or loans, you can budget for future financial demands like emergencies and growth if you keep accurate financial records.
6. Loans Requirement
Nothing is ever assured when it comes to your company’s finances. You might need to seek assistance from funding sources if your cash flow is not as consistent as you would want it to be. These funding sources would request your financials to ascertain if the business is strong enough to pay back the loan. Therefore, it is imperative that you maintain accurate and current financial reports.
In conclusion, one of the most important parts of every business is its financial reporting. When a business has significant accomplishments or unanticipated setbacks, it is easiest to illustrate the significance of its financial statements.
As a small business owner, with your finances, well organized, that is there should be a system that is put in place in your business environment to ensure an accurate financial reporting system, it will help your business grow and in return gives a good view to stakeholders.
Article was written by Oluwadahunsi Adeyinka