Financial Reporting Essentials: Mastering the Basics

Financial Reporting Essentials: Mastering the Basics

Kurt GraverBusiness Development

According to a Financial Executives Research Foundation (FERF) survey, 70% of CFOs believe financial reporting is critical to their company’s success. Yet, only 45% feel that their current reporting processes are effective [1]. This highlights the need for entrepreneurs to master the essentials of financial reporting and leverage its insights to drive business performance.

In this blog post, we will explore the key types of financial reports that UK businesses need to prepare, discuss the importance of regular and accurate reporting, and provide practical tips for using financial insights to inform decision-making and drive performance. By the end of this post, you will clearly understand how to use financial reporting to your advantage and take your business to the next level.

Types of Financial Reports


There are several types of financial reports that UK businesses need to prepare, depending on their legal structure, size, and industry. The most common types of financial reports include:

Balance Sheet
The balance sheet is a snapshot of a company’s financial position at a specific time, typically the end of a financial year. It shows the company’s assets (what it owns), liabilities (what it owes), and equity (the difference between assets and liabilities). The balance sheet is important because it provides insight into a company’s solvency, liquidity, and financial stability.

According to the Companies Act 2006, all UK limited companies must prepare a balance sheet as part of their annual accounts [2]. The balance sheet must be audited by an independent auditor and filed with Companies House within nine months of the end of the financial year.

Income Statement
The income statement, also known as the profit and loss (P&L) statement, shows a company’s financial performance over a specific period, typically a month, quarter, or year. It shows the company’s revenue, expenses, and profit or loss. The income statement is important because it provides insight into a company’s profitability and efficiency.

According to the Companies Act 2006, all UK limited companies must prepare an income statement as part of their annual accounts [2]. The income statement must be audited by an independent auditor and filed with Companies House within nine months of the end of the financial year.

Cash Flow Statement
The cash flow statement shows the inflows and outflows of cash for a company over a specific period, typically a month, quarter, or year. It is divided into three sections: operating activities (cash flows from the company’s core business operations), investing activities (cash flows from the purchase or sale of long-term assets), and financing activities (cash flows from the issuance or repayment of debt or equity). The cash flow statement is important because it provides insight into a company’s liquidity and ability to generate cash.

According to the Financial Reporting Standard (FRS) 102, all UK companies that meet certain size criteria must prepare a cash flow statement as part of their annual accounts [3]. The cash flow statement must be audited by an independent auditor and filed with Companies House within nine months of the end of the financial year.

Statement of Changes in Equity
The statement of changes in equity shows a company’s equity changes over a specific period, typically a financial year. It includes changes due to profit or loss, dividends, share issuance or repurchase, and other comprehensive income. The statement of changes in equity is important because it provides insight into a company’s ownership structure and how it changes over time.

According to FRS 102, all UK companies that meet certain size criteria must prepare a statement of changes in equity as part of their annual accounts [3]. The statement must be audited by an independent auditor and filed with Companies House within nine months of the end of the financial year.

Notes to the Financial Statements
The notes to the financial statements provide additional information and explanations about the items reported in the other financial statements. They include information about the company’s accounting policies, significant transactions, contingencies, and other relevant details. The notes are important because they provide context and transparency to the financial statements and help users understand the company’s financial position and performance.

According to the Companies Act 2006, all UK limited companies must prepare notes to the financial statements as part of their annual accounts [2]. The notes must be audited by an independent auditor and filed with Companies House within nine months of the end of the financial year.

Importance of Regular and Accurate Financial Reporting


Regular and accurate financial reporting is essential for several reasons:

Compliance
UK companies are legally required to prepare and file financial statements with Companies House on an annual basis. Failure to do so can result in penalties, fines, and legal action. Regular financial reporting helps companies comply with legal and regulatory requirements and avoid costly consequences.

Decision-Making
Financial reporting provides critical insights that can inform business decisions. By regularly reviewing financial statements, entrepreneurs can identify trends, opportunities, and risks and make informed decisions about resource allocation, investment, and strategy. According to a survey by EY, 79% of CFOs believe that data and analytics will be a key driver of business strategy in the future [4].

Performance Monitoring
Financial reporting allows entrepreneurs to monitor their company’s performance over time and compare it to industry benchmarks and competitors. By tracking key financial metrics such as revenue growth, profitability, and cash flow, entrepreneurs can identify areas for improvement and take corrective action as needed. According to a survey by PwC, 77% of CFOs believe that financial benchmarking is important for driving business performance [5].

Stakeholder Communication
Financial reporting is key for communicating with stakeholders such as investors, lenders, customers, and employees. By providing transparent and accurate financial information, entrepreneurs can build trust and credibility with stakeholders and demonstrate the company’s financial health and prospects. According to a survey by the CFA Institute, 82% of investors believe that financial reporting is important for making investment decisions [6].

Tips for Using Financial Insights to Drive Performance


Now that we understand the types of financial reports and the importance of regular and accurate reporting let’s explore some practical tips for using financial insights to drive business performance:

Focus on Key Metrics
While financial statements provide a wealth of information, it is important to focus on the key metrics most relevant to your business. These may include revenue growth, gross margin, operating margin, cash flow, and return on investment (ROI). By identifying and tracking these metrics over time, you can quickly identify trends and areas for improvement.

Benchmark Against Industry Peers
Benchmarking your financial performance against industry peers can provide valuable insights into how your company stacks up and where there may be opportunities for improvement. Several sources of industry benchmarking data include trade associations, consulting firms, and financial databases. By comparing your company’s financial metrics to industry averages and best-in-class performers, you can identify areas where you may lag and develop strategies to close the gap.

Use Data Visualization
Financial data can be complex and overwhelming, making it difficult to identify trends and insights. Data visualization tools such as dashboards, charts, and graphs can help simplify financial data and make it more accessible and actionable. By creating visual representations of your financial data, you can quickly identify patterns and outliers and communicate insights to stakeholders clearly and compellingly.

Collaborate with Finance and Business Teams


Financial reporting should not be a siloed activity but a collaborative effort between finance and business teams. By working closely with business leaders to understand their challenges and opportunities, finance teams can provide targeted insights and recommendations that drive business performance. According to a survey by Accenture, companies with strong partnerships between finance and business teams are 2.5 times more likely to have above-average revenue growth [7].

Leverage Technology
Technology can be key in streamlining financial reporting and providing real-time insights. Cloud-based accounting software such as Xero and QuickBooks can automate many of the manual processes involved in financial reporting and provide real-time visibility into financial performance. Advanced analytics tools such as Power BI and Tableau can help finance teams analyze large volumes of financial data and identify insights and opportunities. By leveraging technology, entrepreneurs can save time and resources and focus on using financial insights to drive business performance.

Conclusion


In conclusion, financial reporting is a critical component of business success that every UK entrepreneur should master. By understanding the key types of financial reports, the importance of regular and accurate reporting, and how to use financial insights to drive performance, entrepreneurs can make informed decisions, identify opportunities and risks, and communicate effectively with stakeholders.

To recap, the key types of financial reports that UK businesses need to prepare include:

  1. Balance Sheet
  2. Income Statement
  3. Cash Flow Statement
  4. Statement of Changes in Equity
  5. Notes to the Financial Statements

Regular and accurate financial reporting is essential for compliance, decision-making, performance monitoring, and stakeholder communication. By leveraging financial insights and best practices, such as focusing on key metrics, benchmarking against industry peers, data visualization, collaborating with finance and business teams, and leveraging technology, entrepreneurs can turn financial reporting into a strategic tool for driving business success.

Sources:
[1] Financial Executives Research Foundation (FERF). (2021). The Future of Financial Reporting. Retrieved from https://www.financialexecutives.org/Research/Publications/2021/The-Future-of-Financial-Reporting.aspx
[2] UK Government. (2006). Companies Act 2006. Retrieved from https://www.legislation.gov.uk/ukpga/2006/46/contents
[3] Financial Reporting Council (FRC). (2021). FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. Retrieved from https://www.frc.org.uk/accountants/accounting-and-reporting-policy/uk-accounting-standards/standards-in-issue/frs-102-the-financial-reporting-standard-applicabl
[4] EY. (2021). How are CFOs using data and analytics to drive business strategy? Retrieved from https://www.ey.com/en_gl/assurance/how-are-cfos-using-data-and-analytics-to-drive-business-strategy
[5] PwC. (2021). Unlocking the power of finance benchmarking. Retrieved from https://www.pwc.com/gx/en/services/audit-assurance/financial-benchmarking.html
[6] CFA Institute. (2021). The Importance of Financial Reporting. Retrieved from https://www.cfainstitute.org/en/research/survey-reports/the-importance-of-financial-reporting
[7] Accenture. (2021). CFO Reimagined: From driving value to building the digital enterprise. Retrieved from https://www.accenture.com/us-en/insights/consulting/cfo-research-overview