Though your company’s management may intuitively know whether or not a given product line or the business as a whole is profitable, in today’s economy, it’s essential that you keep good records that can illustrate the financial success of the business. Investors, banks and your board of directors will want more than a basic statement of profitability. Corporate financial reporting provides a variety of accounting methods for showcasing operating data and reporting debits and credits according to basic accounting principles. Industry standards and regulatory guidelines for financial reporting must also be adhered to in this type of accounting.
What Is Corporate Financial Reporting?
Corporate financial reporting is an essential activity for all businesses. This form of accounting should provide investors and creditors with useful information that they can employ in making lending or investment decisions. Since stockholders and lending institutions rely on income or repayment from your business to accurately run their own companies and estimate their cash flow, it’s essential that your company be able to present accurate, timely information that speaks to the overall health of your company. Failure to provide accurate information can not only lead to problems of reputation; it can cause legal difficulties.
Corporate financial statements are essential for tax preparation and audit protection, as well. When your business files monthly or quarterly reports that showcase the health of the company, you may use that information in preparing other, more complex reports come tax time or keep them on hand in case your company is ever subject to an audit.
In general, the primary goal of corporate financial reporting is to provide capital market participants with information for financial decision making. It is not necessary to lower the provided information to the level of a layperson, however. Investors, creditors and other decision-makers are expected to possess a general understanding of accounting principles and apply these to understand the reports furnished by your company.
Why Corporate Financial Reporting is Important
Corporate financial reporting is important because it offers essential information to management, as well as others with capital market interests in your business. This information is necessary for making determinations about future investments, purchases or loans. For corporate leaders, financial reports can be compared to past data to determine how certain decisions have impacted the bottom line and whether similar choices should be made in the future. Also, a high-level look at the company’s overall financial health is critical in determining whether to bring on or reduce staffing, make financial or economic investments, pursue mergers and acquisitions or raise or lower prices. They can also help you to determine the liquidity of your business, which can indicate whether the company can continue as what is called a “going concern,” or an entity that will remain in business for the foreseeable future.
For investors and creditors, corporate financial reports are useful because they disclose the financial obligations of a business. This speaks to the potential for future economic resources to ebb and flow and indicates whether it might be a good time to lend money or invest in your company.
Principles for corporate financial reporting have been laid out by the Financial Accounting Standards Board, which is the successor to the Accounting Principles Board, in existence in the United States since 1973. All corporate financial reporting must follow the Generally Accepted Accounting Principles so that information presented across industries can be universally understood.
How to Use Corporate Financial Reporting
Corporate financial reporting can be used for decision-making purposes by internal and external parties. Particularly for larger companies, in which many major players don’t consistently have access to important financial data, these reports are essential in providing the basis for decisions related to staffing, scaling and setting price levels.
Say, for instance, an automobile dealership is trying to decide whether or not to bring on 10 new employees. The past year has been very busy, with high sales figures. Extra staff on the lot would go a long way to providing superior service for customers. However, the dealership only sells cars from one automaker. The brand hasn’t released a new model in some time, and the vehicles that are being delivered seem to have more and more manufacturer defects. In this scenario, it would be hugely helpful for the car dealership to know whether the automaker is struggling financially at the top and if this has been the cause of less money spent on research and development or quality control.
If the local dealership had the opportunity to review corporate financial reports from the automaker, it could showcase the brand’s income and expenses, as well as its overall assets, liabilities and equity. All of this information might prove useful in determining whether the dealership should scale up with new employees, or whether they should expect a slow down in the future due to the brand’s failure to invest in itself.
Corporate financial reporting can also be helpful for creditors and investors who are on the outside of the business itself. Let’s say the same auto dealership was looking for a loan to expand to a second location. A local bank would need to review the dealership’s corporate financial reports before it could determine if the company is a safe one to lend money to. In addition, the bank would likely wish to review the financial reports of the auto manufacturer, since they present a better depiction of the dealership’s growth potential if they continue to sell just one brand of car.
As a consumer, corporate financial reports are useful when it comes to determining whether you should make personal investments. Say, for instance, you are considering purchasing stock in a telecommunications company. You are unsure which particular telecommunications business would yield the highest dividends based purely on their trading price and stock value history. Corporate financial reports play a critical role for you as the investor, because they enable you to see how the company is performing overall. By reviewing financial reports for multiple telecommunications companies, you should be able to determine which is the best place to invest.
Also, once you hold stocks in a given company, it’s essential to continue to pay attention to its financial reports. Over time, you may see growth trends that encourage you to invest additional funds in their stock. Similarly, however, you might be concerned by something that you see and elect to reallocate your investable income elsewhere.
How to Improve Corporate Financial Reporting
Corporate financial reporting is only as good as the information it is based on. Careful, meticulous statements must be kept for every transaction that is carried out by a company. The day-to-day information must be tracked and fed into monthly and quarterly reports. In turn, these must be accurate, so that semi-annual or annual financial reports are also correct.
There is no substitute for careful bookkeeping. Not only is providing creditors and investors accurate information essential from a moral standpoint, the failure to do so can cause significant legal difficulties. Also, internal decision-makers must have access to up-to-date, completely accurate financial information so that they can make informed choices to propel the company forward.
As a decision-maker within a company, it’s important to review corporate financial statements carefully. If anything seems amiss or out-of-place, report it to the appropriate parties immediately. No matter how careful the accounting department might be, mistakes do creep in from time to time. Staying vigilant and informing the powers that be of any errors could go a long way in putting the company on the proper trajectory. In addition, doing so could lead to a fix of the corporate reports before they enter the hands of investors or creditors. Once an error reaches that point in the process, it will likely be far more problematic.
What Are the Four Types of Corporate Financial Reporting?
When preparing corporate financial reports, there are generally four types of financial statements that can be used. These parallel the financial statements used in the accounting industry. They are income statements, balance sheets, statements of cash flow and statements of changes in equity. Each relies on slightly different information and provides those who review them with a different look at the financial health of the business.
An income statement is used to illustrate the financial performance of an organization over a certain period of time (the reporting period). The income statement reports all sales, and it then includes expenses incurred. By subtracting expenses from sales, it is possible to arrive at a net income or net loss. If your company deals with shareholders, you might also provide an earnings-per-share figure on your income statement. Since this type of corporate financial report speaks to a company’s overall performance, it is widely regarded as the most useful statement.
A balance sheet is used to illustrate the overall financial position of a company at a given moment in time. Information is classified into one of three categories: assets, liabilities and equity. According to Generally Accepted Accounting Principles, items within the assets and liabilities categories should be presented in order of most to least liquid. This statement is also prized by creditors and investors for its ability to speak to the overall health of a company.
Statements of cash flow are used to show the money that has come in and gone out from the business during a given period of time. Generally, this sort of financial statement is broken down into three categories: operating activities, investing activities and financing activities. This type of report is usually less widely distributed, as it does not paint as clear a picture of a company’s overall financial state. In addition, it can be difficult to decipher for the layperson.
The final type of corporate financial report is a statement of changes in equity. This document illustrates all changes during a given period to shares of stocks, dividends and profits or losses. For this type of report, the beginning equity plus net income, minus dividends and plus or minus any other changes are equal to the ending equity. Statements of changes in equity are typically only supplied to outside parties. The utility of this sort of report for management and making internal financial decisions is limited.
To get the best sense of a company’s overall financial health and well-being, the review of all four types of corporate financial reports is ideal. Doing so provides a holistic look at what is going well and what isn’t for the business, and, since it is viewed on such a large scale, can offer suggestions for improvement that might be missed if the reports are viewed independently. It is important, however, to use caution when releasing corporate financial statements to external parties. Creditors and investors should only receive information that is required by the Generally Accepted Accounting Principles or that is absolutely necessary for their decision-making.