Financial reporting is critical to all businesses, regardless of their size.
This process ensures your organization has access to reliable, comprehensive data, providing valuable insights into performance and overall financial health. Based on that information, you can make data-informed decisions that encourage a healthy ROI and ongoing growth. While the process may seem overwhelming, well-organized records and the power of automation can simplify financial reporting, especially when you focus on collecting complete data. Here are the types of financial reports to consider, exploring their purposes, formats, and most critical components.
Why does financial reporting matter?
Financial reporting involves documenting financial activities over a set period. This process helps you stay organized so that, when needed, you can view your organization's financial status.
The report you use will depend on your objective. For example, while you'll want your income statement and balance sheet handy during tax season, an earnings report will be necessary when seeking investments.
As an SMB, financial reporting helps you:
- Maintain detailed records, allowing you to benefit from greater tax savings.
- Understand tax requirements, such as whether you need to charge GST/HST.
- Experience a smoother process if you are audited. Auditors can use other methods to determine income or GST/HST net tax if information is missing.
Balance sheet overview
Your balance sheet is a fundamental document comprising your organization's financial statements.
When analyzing your balance sheet, you'll get a summary of your organization's financial position at a certain time. You can quickly see what you own and owe — understanding the organization's financial health.
The main components include:
- Current assets
- Fixed assets
- Current liabilities
- Long-term liabilities
- Shareholders' equity
Income statement analysis
Income statements, also known as profit and loss statements, are another essential financial document, and your ability to read them is crucial. This statement summarizes all expenses and income over a set period, often shared quarterly or annually.
Like your balance sheet, your income state can help determine your organization's financial health. However, this analysis also lets you set meaningful goals, adjust your business strategy, and predict future opportunities based on financial trends.
Here are the elements of an income statement:
- Revenue
- Expenses
- Cost of goods sold
- Gross profit
- Operating income
- Income before taxes
- Net income
- Earning per share (EPS)
- Depreciation
- Earnings before interest, taxes, depreciation, and amortization (EBITDA)
Following an analysis of an income statement, you can make connections to cut costs and implement growth strategies. For example, you may see that sales are improving or your cost of goods is dropping while the return on equity is rising. You can link this data to current business operations, adapting as needed.
Cash flow statement importance
A cash flow statement showcases profitability, strength, and potential long-term outlook. It provides data on all cash inflows from ongoing operations and external investment sources and shows the amount of cash going out over a specific period.
Use this statement to analyze or share data with investors to indicate where money is going and where it's coming from. Based on this analysis, you'll determine whether your organization has enough cash to meet all obligations and operating expenses.
While these statements are often prepared annually, they can also be created monthly, quarterly, or semi-annually. Cash flow statements report inflows and outflows based on the following activities:
- Operating activities, like taxes, wages, rent, utilities, supplier costs — and cash collected from customers
- Investing activities, like the cost of buying a building or equipment
- Financing activities, like getting a loan, paying a loan, and receiving share proceeds
Read more: The Importance of Cash Flow Statements (And How to Prepare Them)
Annual report contents
Annual reports are comprehensive documents highlighting your organization's performance during the preceding year.
This report will include components like:
- Performance highlights
- Letter from the CEO
- Financial data
- Objectives and goals for the future
Annual report users are investors, shareholders, customers, and employees.
Interpreting financial ratios
Financial ratios are critical snapshots that help you better understand your organization's financial viability. These ratios can reveal information about your organization, such as whether you've taken on too much debt or are stocking too much inventory.
You can find ratios on financial dashboards and reports to measure performance, broken down into categories such as:
- Liquidity ratios, including current and quick ratios
- Activity ratios are efficiency ratios, including average collection period and inventory turnover
- Profitability ratios, including gross profit margin, return on equity, net profit margin
- Leverage ratios, including debt to equity, debt to assets, and debt coverage ratio
Prioritize your understanding of financial reporting
Whether you want to ensure your budget is on track or make the next tax season a breeze, you must prioritize financial reporting this year and beyond. A comprehensive understanding of different financial reports will ensure more effective financial analysis and decision-making.
Need help with your bookkeeping services? Enkel provides solutions that take the stress and complexity out of bookkeeping obligations. Need to turn your financial data into an action plan? If you are a Canadian business or non-profit, Enkel can help you with that, too.
Check out these additional resources to support you along your journey:
- The Role of Technology in Enhancing Financial Reporting
- Guide to Grant Reporting: Preparing Accurate Financial Reports for Your Funders
You can also find more resources and solutions based on your industry.Ready to chat about your options? Connect with Enkel today!
