Financial reporting is a critical element of any business or organization, serving as a means of communicating the financial health and performance to stakeholders. To ensure accuracy and the smooth ability for in depth financial analysis, Financial Reporting involves three main concepts 1) a correct budget, 2) an accounting team that works with Finance, and finally 3) automation and analysis.
Financial Reporting begins with the budgeting process and involves both contributions from the Finance (FP&A) and accounting departments to ensure smooth implementation. During budget season it is the responsibility of the Finance team to ensure that all Revenues and Expenses are accounted for, but more importantly to ensure that they are planned or mapped to the correct account category. While some account mapping might be easy, others usually involve speaking with stakeholders during the process to determine where a Revenue or Expense should be mapped.
Throughout the year it is the responsibility of the accounting team to accrue the revenues and expenses to their corresponding account category. In instances where they are unaware of where the revenue or expense should be accrued to, they should contact the Finance department to determine where it was budgeted. In doing so, this maintains consistency with the budget which will ultimately aid in the final concept of financial reporting, automation.
Finally, through the correct budgeting and booking of accruals for Financial Reporting, we get to the most important component, automation, and analysis. Whether you have an Enterprise Resource Planning (ERP) system or are using Excel, you can always find ways to automate your financial reporting. The more you can automate and take out manual work, the more analysis you can conduct of your monthly, quarterly, yearly, or even ad hoc financials. Usually, the guidelines for analysis leads to the actuals being favorable or unfavorable to the budget or forecast, with the Finance department researching the drivers that impacted the business, which will provide insight when reported to upper management.
"Financial reporting leads to the analysis in finance, where stakeholders can take the information to make informed decisions"
Financial Reporting leads to the analysis in Finance, where stakeholders can take the information to make informed decisions. These reports will help gauge the risks, rewards and requirements associated with the business. It allows the business to determine the drivers or external and internal impacts to the health of the business or company. Through analysis of the financials, the business can look at future growth and current risks and opportunities. For example, a financial services company in the current market could view that rising interest rates are going to shrink revenues, however expenses, especially overhead could remain flat, which could ultimately affect the profitability of the business. If the company wishes to remain competitive, their best course of action would be to do what most mortgage/financial services companies did recently, which is to reduce their workforce for the future stability of the company. On the other hand, if revenues are higher than budgeted or forecasted an analysis could show that the marketing of a new product has produced better than expected returns, which in turn could the companys focus to the utilizing the same marketing strategy when another new product hits the consumer market, hoping to see the same yields.
In summary, financial reporting is a critical process that allows organizations to communicate their performance to stakeholders, ensuring transparency and knowledgeable decision-making. Financial Reporting plays an important role in evaluating the effectiveness and outlook of the business, by providing, not only the numbers, but the information behind the drivers, which ultimately provide insight into the companys financial health.
