Why is Financial Reporting Important?

Financial reporting is the process of gathering a business’s financial statements to produce and publish a report that depicts the company’s overall financial position. All companies across Canada must create and publish periodic financial reports, making these documents an essential part of running a business.

Why are financial statements important, and what should financial reporting mean to you as a small business owner? 

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What Is The Purpose Of Financial Reporting?

A business’s financial reports serve the function of transparency and accountability within the market industry. Companies across Canada are required by law to record all transactions of their business, using this information to create financial statements. These statements are compiled into a financial report, which is then published online for public dissemination.

These reports provide a snapshot of the business’s financial position, illustrating how well they are doing within their daily operations. The purpose of financial reporting is to supply this snapshot to internal and external entities- such as the Canada Revenue Agency and investors, stakeholders, and creditors.

Therefore, a financial report of a company should be able to answer all of these questions:

  • Is the business making a profit or losing money?
  • What are the business’s assets, and how do they compare to their liabilities?
  • What is the business’s working capital, and do they have a positive or negative cash flow?
  • Did the business reinvest the profits it made?
  • Is there a potential for growth in the company? Do they have the capital to expand?

Your small business must publish these records publicly, so others can check that you are following all regulations and that your business is running successfully. By publishing the financial statements and reports, you allow others of importance to view this information, including:

  • Internal management
  • Stakeholders
  • Partners in ownership
  • Potential investors
  • Creditors
  • Industry-specific organizations
  • Governmental bodies

Why are financial statements important

business’s financial statements illustrate the actual status of the company’s financial performance in a given period. These statements – the income statement, balance sheet, cash flow statement, and statement of retained earnings- are all documents created from the business’s accounting records in question.

Companies across Canada must record all transactions surrounding a business, using the International Financial Reporting Standards, or IFRS for short. This independent organization created a set of guidelines all companies must adhere to when compiling their reports. These guidelines help businesses accurately track and record all money entering and exiting the business in a uniform manner.

Others can use these statements to determine how well the business performs while ensuring they are following all laws and requirements. These are the primary uses of financial statements compiled into your business records.

What Are The Major Uses of Financial Reporting?

This reporting for small businesses should depict true and accurate financial information. Hence, these reports’ goal is to provide a precise and detailed account of the company’s dealings to the public. Such in-depth reports are then used for a number of purposes.

Industry standards and legal regulations

First and foremost, these reports’ primary objective is to ensure that the business follows all laws, regulations, and ethical standards. Suppose your financial statements don’t add up, or your figures look suspicious. In that case, external auditors can determine if your business is breaking the law and committing accounting fraud or other illegal offences.

Public knowledge for potential investors

The second objective is to provide this information for public dissemination. Investors must be allowed to know the inner finances of a business if they are to invest within the company in question. Therefore, another of the primary uses of financial statements is to illustrate the company’s standing within the market industry for potential growth and further investment opportunities.

Monitoring financial health

Thirdly, companies can use these reports as internal management tools for decision making. Small business owners can look at their assets, liabilities, and other pertinent information stored within their financial statements and reports to glean insight into their current market standing to determine how best to improve their services and processes. Such reports can help management monitor and improve their finances for the next accounting period.

Debt management

Lastly, these reports demonstrate a company’s financial position in a given period, which can be used by management to secure bank loans or lines of credit when they are in need of money for debt management. As these documents illustrate, all the information needed to acquire a loan and must be publicly available, creditors and lenders will look at a company’s reports to determine how reliable they would be in terms of paying the money back.

Financial Reporting and Your Small Business

As a small business owner, it'll fall to you to track your business’s finances and create these reports for public and private consumption. If you need help in this endeavour, consider using accounting software to track your business’s cash flow automatically. Such software can  generate financial statements and reports  that you are required by law to make.

QuickBooks Online has helped millions of business owners across Canada accurately depict their companies’ financial health. With this quality software’s assistance, your business can benefit from professional accounting features that can create your financial statements and reports seamlessly. Try it free today!

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