Understanding and managing finances effectively is vital for the success of your business. Financial reporting can help you monitor your business's financial health, ensure regulatory compliance, and make sound decisions.

Whether you're a new or seasoned business owner, financial reporting provides the insights you need to succeed.

Table of contents

• What is financial reporting?

• Why is financial reporting important?
• Who uses these financial reports?
• The 4 core financial statements you need
• How financial reporting supports your business
• Best practices in financial reporting
• Growing your business with financial reporting tools
• FAQ

What is financial reporting?

Financial reporting involves recording and communicating a business’s financial activities over a specific time frame. The process includes preparing financial statements that show various metrics about a business's financial position, performance, and cash flow.

Why is financial reporting important?

Financial reporting for growing businesses is incredibly important. Here are a few reasons why:

Better transparency

Financial reports provide an honest view of your financial activities, which can help build trust with investors, stakeholders, and lenders. By having a clear overview of your business’s financial health, you can build strong relationships with those who have a vested interest in your company’s success.

Informed decision-making

Regular financial reporting lets you make data-driven choices that positively influence your business’s growth. Smaller businesses will find this valuable because each decision may have a significant impact, particularly when owners are working with limited resources.

Compliance

Businesses must maintain detailed records to meet federal and provincial regulations in Canada. Financial reporting helps you remain compliant and avoid fines. Also, having detailed financial reports ensures your tax filings are accurate. This reduces the chance of a costly audit and penalties.

Who uses these financial reports?

In Canada, financial reports serve different stakeholders, including business owners, creditors, investors, employees, and regulatory bodies such as the Canada Revenue Agency (CRA). These reports help monitor financial well-being, analyze profitability, ensure compliance, and offer transparency. 

Public corporations are required to follow stricter reporting protocols. This information displays open and honest information to investors and adheres to the International Financial Reporting Standards (IFRS) to maintain global accountability. 

Public and private companies must produce income statements, cash flow statements, and balance sheets for regulatory and public scrutiny. This helps ensure financial transparency for all stakeholders.

The 4 core financial statements you need 

Each financial statement serves a specific purpose, offering a unique perspective on your business's finances.

Below are the details of each type of financial statement you need:

1. Balance sheet

A balance sheet offers an overview of your business's financial position at a specific time.

It consists of three parts:

• Assets are the resources the business owns, such as cash, equipment, inventory, property, and accounts receivable. These assets can be further categorized into current and long-term assets.
• Liabilities are what the business owes to others. This includes accounts payable, loans, and other types of debt. Current liabilities are those due within a year, while long-term liabilities are due more than a year out.
• Equity is a business owner’s stake in the company after the liabilities are deducted from the assets. This includes retained earnings, which show the growing profits reinvested in the business.

The balance sheet formula subtracts your company’s assets from its liabilities to determine equity. 

Assets – Liabilities = Equity

The balance sheet is usually called the "statement of financial position" because it highlights your business’s net worth at a certain time. As a result, it’s an important tool for understanding your business’s liquidity and overall financial stability.

2. Income statement

The income statement (or profit and loss statement) shows the revenues and expenses over time and highlights the company’s profitability.

This financial report includes the following:

• Revenue is the total income generated from business operations, including goods or services sold to customers.
• Cost of goods sold (COGS) is the direct cost of producing goods sold or services provided.
• Gross profit is the revenue minus COGS, indicating how proficiently you produce goods or services.
• Operating expenses are the ongoing business costs. This includes rent, utilities, advertising fees, office supplies, and employee wages.
• Net profit/loss is the bottom line item showing whether your business is generating a profit or incurring a loss. Net profit is calculated by taking the total revenue and subtracting the total expenses.

The following is the income statement formula:

Revenue – Expenses = Net income

An income statement helps assess your business's operational efficiency and profitability. Additionally, it can help you understand seasonal fluctuations and make financial forecasts.

3. Cash flow statement

The cash flow statement explains how cash goes in and out of your business. It also provides insights into liquidity and operational efficiency.

A cash flow statement is separated into three sections:

• Operating activities are the cash generated from core business operations, including sales and daily expenses.
• Investing activities are based on the cash spent on or received from investments, such as purchasing equipment or selling assets.
• Financing activities are cash transactions related to business funding. Loans, debt repayments, and dividend payments are a few examples.

The cash flow statement formula is:

Beginning balance in cash + Net changes in operating, investing, and financing activities = Ending cash balance

Understanding cash flow is imperative for small and medium businesses. A positive cash flow means you can meet your obligations, cover payroll expenses, and reinvest the excess funds in the business. A cash flow statement can also help you plan for future goals and prevent cash shortages.

4. Statement of changes in equity

This report details changes in ownership equity over a period for businesses that have shareholders.

It includes the following categories:

• Retained earnings are the profits kept in the business rather than distributed as dividends to shareholders. This indicates how much profit the business is reinvesting to grow.
• Dividends paid are the amount distributed to shareholders, which decreases the retained earnings.
• Share capital is the money raised through issuing shares. This highlights the investment made by the business owners or external investors.

To determine the end balance of changes in equity, follow this formula:

Ending retained earnings = Beginning retained earnings − Dividends paid + Net income

This financial statement is helpful for businesses looking to understand how retained earnings are distributed. It also shows how much of the business’s profits are reinvested versus distributed to its shareholders.

How financial reporting supports your business

Financial reporting is more than a compliance task — it’s a valuable tool that can help your business grow.

Let’s explore some of the benefits:

1. Improves financial planning

Accurate financial reporting is vital for creating a solid financial plan. Not only can it help you forecast revenues, expenses, and profits, but it can also make it easier to set goals.

Budgeting: With correct financial data, you can create a budget that supports your business goals. It also allows you to track your progress throughout the year.

Forecasting: By analyzing financial reports, you can make educated predictions about future trends and prepare for possible challenges.

2. Strengthens access to funding

Potential investors and creditors rely on financial reports to find essential information about the profitability and health of your business. These valuable insights can improve your odds of enticing investors, obtaining loans, and negotiating better terms and conditions.

Investor relations: Transparent and accurate reporting establishes trust with existing and potential investors. It proves that your business is financially sound and carefully managed.

Loan applications: Lenders generally rely on comprehensive financial statements to determine loan eligibility and whether you can repay your loans on time. 

3. Helps with compliance and tax preparation

Keeping your financial statements organized will help make tax preparation more straightforward. Plus, it helps ensure your business complies with Canadian tax regulations.

Regular financial reporting allows you to:

Remain compliant: You can meet federal and provincial tax requirements by maintaining precise records of all transactions.

Avoid interest and penalties: Detailed financial reporting ensures smooth tax filing, reducing the risk of penalties or audits by the CRA.

Claim business expenses: By keeping detailed records and maintaining receipts of business expenses, you can maximize deductions and reduce your tax liability.

Best practices in financial reporting

Here are some best practices you can implement in your business:

• Prioritize regular reporting: Create monthly or quarterly reports to measure ongoing financial health.
• Ensure accuracy: Ensure all financial data is accurate before sharing your reports.
• Be consistent with formatting: Maintain a standard format for clarity over time.
• Use technology: Leverage accounting tools to automate processes and reduce errors.
• Review and analyze: Regularly review reports to identify trends, assess your strategies, and address any issues in a timely manner.
• Maintain compliance: Adhere to Canadian rules and regulations for financial reporting.

Growing your business with financial reporting tools

Financial reporting is more than a regulatory requirement. It’s a powerful tool that provides key insights into your business’s performance, helping you make educated decisions and plan for the future.

By understanding and incorporating financial reporting practices, you can position your business for long-term growth.

Are you looking to track your company's performance and access customizable financial reports? QuickBooks Online Advanced can help you automate key accounting tasks and improve productivity to help your business grow sustainably.