In the past, most businesses never saw the need for financial reporting, they never appreciated how it will contribute to business growth and survival. Such businesses were often denied credit facilities they sought for business expansion and related reasons. They also suffered from losing a lot of business opportunities that having financial statements came with. The situation sadly still persists today.
The nature of business today is more complex and trends keep changing. These have made the need for financial reporting more pressing than it was when business activities were on a small scale and situations of business could be handled easily even by a non-business person or persons.
In this article, I present a highlight of what financial reporting is, an explanation of some of the immense benefits that accrue from it and how businesses, both small and large, can leverage on these advantages.
What is financial reporting?
Financial reporting describes the preparation and presentation of financial statements. Financial statements are a summary of the financial activities of a business or firm for a particular period or at a particular time. They give three principal information about a business: its financial performance for a period, changes in its financial performance for a period and financial position as at a particular date. As a result, there are three main financial statements. These are statement of profit or loss and other comprehensive income, hitherto called profit and loss account; statement of cash flow; and statement of financial position, formerly called balanced sheet. Other statements too however exist. They are statement of changes in equity and a summary of significant accounting policies and other explanatory notes.
It must be stated that financial reporting is a highly regulated area as against management accounting or reporting which is not. Thus, financial reporting must conform to a set of guidelines provided by regulatory authorities. Today, the international body that regulates financial reporting is the International Accounting Standards Board (IASB). IASB provides a framework for financial reporting that requires all the statements earlier indicated. Conversely, a business could prepare its financial statements conforming to national instead of international standards. Such statements will however lose international acceptance and opportunities.
What benefits accrue from financial reporting?
- Easy securing of credit facilities
Experiences and research have shown clearly that businesses that seek for credit facilities with well prepared, reliable financial statements easily receive such supports than those without financial statements. This is because lenders assess the credit worthiness of borrowers before advancing credit and one of the ways to do that is through examination of financial statements of borrowers. Having systems in place that promote the preparation of financial statements means that as a business, you can easily qualify for the receiving of financing support that can favorably affect your business operations.
2. Attraction of investors
Investors are individuals and institutions that commit their financial and other resources to the business of others in the hope of returns. These people or organizations, as a way of making informed decisions, require financial statements. Therefore, having financial statements will enable you to attract good investments into your business.
- Minimization of interference from regulatory authorities
Often, financial and other governmental regulatory bodies such as the Securities and Exchange Commission, the Bank of Ghana and Ghana Revenue Authority interfere in the operations of firms that do not prepare financial statements. This is because the regulatory bodies find it difficult to tell, in the absence of the financial statements, whether these firms comply with state laws. The outcome becomes unwanted interference in business operations. Your business stands to benefit from such minimized interferences or may not experience them at all.
4. Business decision making
Business decisions are made virtually every time. These include decisions of cutting down payroll cost and other expenses, leasing or purchasing an asset, improving sales level, among others. Though decisions could be made in the absence of financial statements, it is worthy to mention that better decisions could be made if financial statements existed. Owners and management of your business can therefore make well-informed and more-enhanced decisions with financial statements.
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