Accurate Financial Reporting: Why It’s Important and How To Do It

Accurately reporting your company’s financials will keep you safe from legal troubles and directly boost your business’ success.

Financial reporting and statements are critical for making informed decisions, attracting investors, and, yes, staying compliant.

By understanding the function of financial reporting and the best ways to do it, you’ll be able to produce more accurate financial reports and statements with less effort.

In this article, we cover what financial reporting is, why financial statements are important, and how to go about it the right way.

Key Takeaways

  • Financial reporting is the communication of financial data to stakeholders. The four financial statements include the balance sheet, income statement, cash flow statement, and statement of shareholders’ equity.
  • Accurate financial reporting is essential for effective company planning, maintaining good relations with stakeholders, and complying with regulations.
  • Efficient and accurate financial reporting starts with using the right accounting software and standardizing all accounting procedures.
  • Specific best practices include saving receipts, bookkeeping every day, regularly reconciling bank accounts, and setting rules for employee expense reporting.

What Is Financial Reporting?

Financial reporting is the process of communicating your business’ financial data to stakeholders.

What Gets Communicated?

Companies deal with many different types of financial data. Most people are familiar with income, expenses, profits, and losses. But there are others as well:

  • Assets: These are items of value owned by a company, including office equipment, buildings, and even cash.
  • Liabilities: These are financial obligations that a company owes to others, including mortgages and other outstanding loans.
  • Equity: This is the net worth of a company or the amount owned by shareholders.

You don’t need to report every single piece of financial data to your stakeholders—but you should report all the important ones listed above.

How Is It Communicated?

Companies report their financials primarily through four financial statements:

  • Balance sheet: This is a snapshot that shows a company’s assets, liabilities, and equity at a specific point in time.
  • Income statement: This shows company profits or losses over a given period.
  • Cash flow statement: This summarizes how much cash a company has on hand.
  • Statement of shareholders’ equity: This shows the value of the shareholders’ portion of a company.

Your goal with financial reporting should be to provide your stakeholders with a clear and accurate summary of your business’s financial health.

Why Financial Reporting Is Essential for Business Success

Accurate financial reporting improves company planning, stakeholder relations, and regulatory compliance.

Company Planning

To enhance your business’ performance in the future, you need to know how it has performed in the past—and how it’s performing now.

If the financial data you’re using to make decisions is inaccurate, you’ll end up making the wrong decisions. For example:

  • If your income statement shows more income than you actually earned, you may end up spending more than you should.
  • If your cash flow statement shows less cash than what’s in your bank accounts, you might miss out on some possible investment opportunities.

On the other hand, if your financial reporting is accurate, you’ll be able to put proper spending controls in place and use all of your spare cash to invest as you see fit. Ultimately, accurate financial reporting greatly increases your ability to make well-informed decisions for your business’s future.

Stakeholder Relations

A stakeholder is anyone whose financial future depends on your business. Stakeholders can be customers, employees, suppliers, or even creditors—but the most important stakeholders for financial reporting are investors.

Accurate financial reporting allows current investors to decide between selling, holding, or purchasing more of your business’ stock. It also helps potential investors decide whether or not they want to take the plunge.

In any case, consistently accurate financial reporting increases all stakeholders’ confidence in your business. This makes them more likely to invest, more willing to offer loans, or even more likely to apply for a job.

Regulatory Compliance

For publicly held companies, financial reporting is strictly regulated and subject to yearly audits. This is to protect stakeholders from company fraud. If any inaccuracies are found, there could be serious legal repercussions, such as fines, penalties, or even criminal charges against company executives.

Ensuring Accurate Financial Reports: 8 Best Practices

“I’ll get to it later” is the worst way to approach financial reporting.

Before getting specific, simply commit to practicing financial reporting the right way.

Develop your own company-wide best practices and stick to them. Standardize documentation processes, assign specific roles to your employees, and deal with any problems immediately as they arise.

By making these commitments at the outset, you’ll save yourself from a host of unnecessary problems down the line.

1. Use the Right Accounting Software

Choose an accounting software that fits your business’ size and industry. FreshBooks, Oracle NetSuite, and Sage are some of our favorite accounting software solutions.

Nearly all accounting software in 2024 contains features that can save remarkable amounts of time and greatly improve accuracy—but not everyone knows about them.

Features include:

  • Real-time bank feed: This enables automatic syncing with your bank to bring in new transactions.
  • Automatic categorization: This feature looks at keywords and amounts of recurring transactions and books them for you as they come in.
  • Invoice creation and tracking: This provides preset invoice templates and the ability to track payment statuses directly from the software.
  • Payroll processing: This feature allows you to program automatic paychecks for your employees.
  • Real-time reporting: This keeps your financial statements and other reports fully up to date at all times.

2. Save Every Receipt

Whenever your business receives a receipt for anything, digitally scan it and save it in your accounting software. Come up with a consistent naming convention, such as “Receipt_Date_Vendor_Amount.” Adhere to this convention for every receipt your business receives.

Digital storage is important but not sufficient. You should also physically file every receipt in a dedicated folder. Each vendor should have a separate folder, with sub-folders labeled by month and year.

3. Record Transactions Every Day

If you wait weeks or months before recording your business transactions, you’ll be much more likely to rush through the backlog and make avoidable errors. That’s why you should block out a portion of every weekday for bookkeeping.

Use your accounting software’s real-time bank feed feature to examine and categorize every income or expense item that comes in. For expenses that come with physical receipts, do a quick spot-check to make sure the amounts in the software and on the receipts are the same.

4. Review Your Bank Accounts Every Week

No matter how careful you are when bookkeeping, mistakes will happen. Set aside a day per week for an informal review of your bank accounts.

Start with one account and compare the balance on your bank statement with your accounting software. If the totals match, it’s very unlikely you have an error. If the totals don’t match, immediately investigate why—even if the difference is tiny. Small reconciliation differences are often caused by huge errors.

5. Reconcile Your Bank Accounts Every Month

In addition to weekly reviews, perform a formal bank reconciliation on the first weekday of every month.

Here are some tips on what might be causing discrepancies and how to resolve them:

  • Unrecorded transactions: Very recent transactions—like end-of-month bank fees—may not have made it into your accounting software yet, even though they show up on your bank statement. Bookkeeping every single day will help to prevent this.
  • Timing differences: Check if the discrepancy amount matches the total of an outstanding check. Since checks take time to cash, you may have entered one into your accounting software before it cleared with your bank.
  • Data entry errors: As long as a human is running your books, these will happen. Common examples are duplicate entries, wrong amounts, or right amounts in the wrong accounts.

Again, it’s vital to reconcile your accounts every month. The longer you wait, the more these discrepancies will accumulate, making the mess harder to sort out with time.

6. Set Rules for Employee Expense Reporting

Improper employee expense reporting is one of the easiest issues to resolve but one of the most overlooked.

Send out an expense report template from your accounting software to all employees, and require they each save their own copy. Ensure every employee fills out the report, with receipts attached, within a week of incurring an expense.

Make sure each expense report includes:

  • Transaction date
  • Amount
  • Purpose
  • Client or project code
  • Receipt

7. Stay Updated on Accounting Standards

Accounting standards are always changing. For most small businesses, these changes don’t matter too much. But for larger companies—especially publicly held ones—it’s a different story.

To stay updated, find the official website of the accounting standards board in your country and subscribe to its email list. The board will send routine emails with relevant updates to the accounting code.

8. Hire an Accountant

If your business is growing rapidly and you’re overwhelmed by all the work, consider hiring an accountant. This enables you to outsource the complex responsibilities to a specialist who already knows the ins and outs of the financial reporting process.

Conclusion

Financial reporting means communicating your financial data to your stakeholders. It’s primarily accomplished using the four main financial statements: the balance sheet, income statement, cash flow statement, and statement of shareholders’ equity.

By following the best practices laid out in this article, your business will be able to report its financials with more accuracy and efficiency, resulting in better planning, improved stakeholder relations, and compliance with the law.

For more details on how you can make the most of financial statements as a stakeholder, check out our article on how to read financial statements.

FAQs

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Robbie Mizzone
Editor

Robbie holds a BSc in Accounting and Finance from Centenary University, New Jersey. He's worked for banks and private companies alike, including Kering (Gucci, Balenciaga), focusing on financial reporting, account reconciliation, and complex accrual analysis. An avid explorer and jack of all trades, Robbie's garnered experience in luxury hospitality, carpentry and construction, and is now backpacking solo around the world.