Finance is a key business area for any startup. Not only are you required by law to keep accurate financial records for tax purposes, but those reports also play a key role in your fundraising activities. So, it’s safe to say that the strength of your financial data reporting process could be the difference between success and failure.
In this article, we’ll explore the meaning and importance of financial reporting and the features to consider when choosing your financial reporting system and practices.
What is financial reporting?
Financial reporting is the practice of developing comprehensive financial statements that show the financial information, status and performance of a business over a specific time frame. This standard accounting practice provides investors and business owners with specific financial data to convey the health of a business.
Financial reporting involves two main activities:
- Creating the standard financial statements, including the income statement (also called the profit and loss statement, or P&L), statement of cash flows, balance sheet, and the statement of shareholders’ equity.
- Creating other financial documents that communicate the financial position of your business, such as footnotes to financial statements, shareholders’ annual reports, stocks and securities records, and other financial reports.
What are the standard financial statements?
Financial statements are the hallmark of financial reporting. They are standard documents that must follow generally accepted accounting principles (GAAP) to show the money in your business and convey a picture of your company’s financial health. These four main financial statements are:
- The income statement (or P&L statement) summarizes your company’s financial activities with regard to profits, revenues, and expenses. It shows how much money you generate, your income, and how much you spent over a certain period.
- The cash flow statement summarizes all of a company’s financial transactions to show the movement of cash in and out of the business.
- The balance sheet shows your company’s assets, liabilities, and equities at any given time. It gives a snapshot of the current state of your business.
- The statement of shareholders’ equity shows changes in the interests of the company’s shareholders over time.
These documents help you understand the performance of your business so you can decide where to invest more resources and how to manage your existing resources.
Other important statements include:
Statement of retained earnings — Retained earnings is the amount of a business’s remaining net income after paying out dividends to its shareholders. The statement of retained earnings shows changes in retained earnings for a company over a period.
Shareholder annual reports — These are annual reports issued to stockholders, board members, creditors, and other concerned parties.
Why is financial reporting important?
Financial reporting is important to your business for several reasons:
All businesses are required to report their income for tax purposes. By keeping accurate records, you can find ways to reduce your tax burdens while staying legally compliant with the variety of regulatory requirements companies must adhere to.
Accurate financial reporting and analysis help you understand your startup’s finances so you can make better decisions about your business. Through financial reports, all stakeholders in your business, including partners and investors, can keep track of trends and important business metrics needed to make informed management decisions.
Strategic Debt Management
Financial reports show the monetary resources available to your business and their sources, including your current assets and liabilities. When you thoroughly understand the financial standing of your business — how much you owe and how much revenue you generate — debt management becomes easier because you can adjust your processes to stay liquid while paying off debt in the long term.
Credibility And Transparency
Financial reporting reveals more than just the financial health of your business over a period of time. It also demonstrates your commitment to your business and your ability to operate in accordance with standard business practices and regulations. This helps build trust with existing and prospective investors.
Limitations Of Financial Statements
Financial statements must be assessed together to gain an overview of the financial position of a business. This is because each report has some limitations when viewed alone.
For example, the balance sheet gives no insight into the operations of the business. The income statement only shows if the company generates a profit — but it could be a small profit. However, these limitations are designed to provide you with certain permissions so that every financial detail is not included in one report.
Features To Consider In A Financial Reporting System
Financial reporting is an important business activity that needs to be done right. This means establishing a process that ensures your business generates accurate reports on an ongoing basis. Some of the features to look out for when choosing a financial reporting system include:
Semi-manual processes like the use of Excel spreadsheets can create room for human error and lead to incorrect financial reports. The solution is to choose a tool like Zeni that not only provides the standard financial statements but also incorporates machine learning and artificial intelligence to ensure the information on those statements is accurate.
Any accounting software can provide basic financial reporting. Choose a reporting system that can provide highly customized reporting in the areas most important to your business. A tool like Zeni takes reporting up a notch by providing vast types of real-time financial analysis and more detailed reports in any area of accounts. For example, if you need an analysis of your revenue to visualize your sources and types of revenue or close monitoring of cash inflows and cash outflows.
While an accountant can understand number-heavy reports, such as the cash flow statement, it may not be the same for decision-makers from non-accounting backgrounds. Choose a system that allows you to visualize your accounting data in more meaningful and context-rich ways. This is exactly what the Zeni dashboard does.
If you’re a young startup that needs insightful, actionable information about your company’s financial performance, Zeni's dashboard generally gives a lot more flavor to the financial statements than basic accounting software. The Zeni dashboard is created by CEOs who understand what is important to key decision-makers and potential investors. It's not meant to provide arbitrary statements that auditors love but nobody else can understand. You can visualize your revenue and OPEX, see what’s going up or down, and gain insight into why that is happening before making any business decisions.
Zeni: The Stress-Free Financial Reporting Software For Startups
Zeni is a full-service finance firm that takes care of all your startup’s financial reporting needs, from taxes to CFO services. Zeni's CFO services provide important non-accounting data and metrics that add context to the information in traditional reports to make them more meaningful and useful to your startup.