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A financial report is a formal record of a business’s financial activities and positions. If you own a small business, there are many situations in which you may need to provide one, such as when you’re applying for business lines of credit, budgeting and forecasting, or building trust with investors, lenders, and stakeholders. This article will help you learn more about what a financial report is and how to create one.
Key Points
• A financial report is a formal record of a business’s financial activities and positions, used to communicate the company’s financial health to internal and external parties.
• Small business owners frequently need financial reports when applying for business funding, forecasting budgets, or building trust with investors, lenders, and stakeholders.
• Transparency through financial reporting builds trust with investors and stakeholders by offering a clear, honest view of the company’s financial condition.
• Key components of a financial report potentially include the balance sheet, the income statement, the cash flow statement, the statement of changes in equity, and the statement of retained earnings.
• Creating a financial report begins with gathering all relevant financial data — including invoices, bank statements, and payroll records — and then selecting the appropriate accounting standards and report type.
What Is a Financial Report?
A financial report provides an overview of a company’s financial life over a set period of time. The financial report includes important data from the balance sheet, income statement, and cash flow statement to show how money is moving in and out of the business. The financial statement also shows profits and losses of the company.
Public companies are required to provide financial statements to the Securities and Exchange Commission (SEC) on a regular basis.
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Core Components of a Financial Report
There are a variety of components that can go into a financial report depending on why it’s being created and who will be receiving it. It frequently includes, for example, a section giving management’s analysis and contextualization of the other documents. Below, we’ll look more closely at three essential core components of a financial report.
Income Statement
An income statement shows the company’s revenues, expenses, and profits or losses over a specific period of time. The income statement provides insights into the company’s operations and profitability. The income statement is also known as the profit and loss statement.
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Balance Sheet
A balance sheet includes the company’s assets, liabilities, and equity at a specific point in time. The balance sheet shows what the company owns and what it owes. Additionally, it shows the interest held by shareholders. The balance sheet is also known as the statement of financial position.
Cash Flow Statement
The cash flow statement includes the company’s inflows and outflows of cash. The inflows and outflows are separated into operations, investing, and financing activities. The cash flow statement helps paint a picture of the liquidity and overall financial flexibility of the business.
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Why Financial Reports Matter
Financial reports are one of the standard business loan requirements when a business is applying for small business loans, small business lines of credit, or cash flow loans.
The lending institution uses the company’s financial statements to evaluate the company’s creditworthiness when deciding on loan applications. A financial report that demonstrates good financial health can help in improving your business loan chances.
Depending on your company’s structure, you may also be required to provide regular financial reports to governmental authorities to ensure compliance with regulations. For example, public companies must file regular financial reports with the SEC.
Additionally, these reports provide valuable information about your company and how it’s working. They’re used for building trust with investors and stakeholders, as well as lenders, through transparency about the company’s financial condition. And finally, financial reports can also help management and other internal stakeholders make better-informed, data-driven business decisions, like whether it’s time to invest in new projects or look for new funding.
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How To Create a Financial Report
To create a financial report, first gather all relevant financial information for the reporting period. This should include transactions like purchase orders, expense receipts, sales invoices, bank statements, payroll records, and accounting balances of assets, liabilities, and equity accounts.
Then determine the accounting standards that you will follow and the type of report that you are creating (like annual vs. quarterly). The most common accounting standard within the U.S. is the generally accepted accounting principles (GAAP). If you’re doing business internationally, you may want to use International Financial Reporting Standards (IFRS).
Next, prepare the key components of the financial statement. These include the following.
• The balance sheet
• The income statement
• The cash flow statement
• The statement of changes in equity
• The statement of retained earnings
Then draft the Management’s Discussion and Analysis (MD&A). The MD&A provides management’s perspective on the financial results and other factors that impact the business.
You may need to add additional components to the financial report, depending on your business needs and the entity receiving the report. This could include a governance report, a sustainability report, an auditor’s report, or a letter to shareholders.
Be sure to review and verify all information for accuracy before formatting the financial report.
The Takeaway
Knowing how to prepare financial reports is essential for any small business owner. Many of the components of financial reports are financial statements that your accountant will already be preparing, so the process doesn’t have to be daunting. As your business grows and you’re considering funding, providing financial reports will be key.
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FAQ
What is the difference between a financial report and a financial statement?
A financial statement is a comprehensive snapshot of a specific financial aspect of your business – like a balance sheet or a cash flow statement. A financial report is composed of various financial statements.
How often should a small business prepare financial reports?
Public companies must file financial reports quarterly with the SEC. Private companies have more discretion but, depending on their complexity and growth, may prepare financial reports yearly, quarterly, or monthly.
Who is required to file financial reports?
Financial reporting requirements for U.S. companies depend on the structure and size of the business. Many corporations, LLCs, and nonprofits are required to file financial reports regularly.
What accounting standards govern financial reporting?
In the U.S., generally accepted accounting principles (GAAP) is the authoritative framework for financial reporting. The Financial Accounting Standards Board (FASB) maintains the Accounting Standards Codification (ASC), which consolidates all authoritative nongovernmental U.S. GAAP into a single source.
What tools can small businesses use to create financial reports?
There are a variety of private services, as well as accounting software options, that can help small businesses create financial reports.
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