What Are Financial Reports Used for in a Business?

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Financial reports are produced once a year to reflect the business’s earnings and spending within the given fiscal year. Although it is produced so shareholders, vendors and investors can see how the business is spending the money, a business may also take use the financial reports to identify the company’s assets and plan its finances.

Identify Assets and Liabilities

Financial reports outline a business’s assets and liabilities during the financial period being discussed. For example, a company can examine all of the assets it owns and all of the liabilities it owes. Executives can also determine if it is better to sell some of the assets to pay off or limit some of the liabilities to improve the company’s financial status.

Identify Financial Standing

Companies can also use the financial report to determine the financial standing of the company, both in terms of the company’s net worth and the monthly financial standing. The net worth is calculated by subtracting the total amount of liabilities from the total assets a company owns. To calculate each month’s financial information, subtract a given month’s expenses from the month’s sales and earnings total. For a collective sum, subtract all of the expenses from the annual earnings total. A business can use the report to identify excessive spending or dips in sales.

Comparisons

Financial reports can also be used to compare annual financial periods. For example, if a financial period was not as positive as expected, the report can be compared to previous years’ reports to determine how the money was spent during better financial periods. For example, if the current financial report suggests that the earnings have decreased and the expenses have increased, the executives may turn to older reports to see how the expenses and sale results differ.

Plan Ahead for Next Financial Cycle

The conclusion of a financial report will often offer solutions to solve any financial issues that may arise in the report. The results of the reports and solutions offered in the conclusions can be used to plan ahead and make adjustments to the company’s budget, if saving money is the company’s goal for the next financial period, for example. Bad results in one financial report may be lessons learned for the next financial period.

References

About the Author

Based in Toronto, Mary Jane has been writing for online magazines and databases since 2002. Her articles have appeared on the Simon & Schuster website and she received an editor's choice award in 2009. She holds a Master of Arts in psychology of language use from the University of Copenhagen in Denmark.

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