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Financial reporting can be described as the process of preparing financial statements that report about the financial performance and position of a company to its stakeholders.<\/span> <\/span>Such reports give a standardised picture of health of business, and all the owners, investors, creditors, and regulators can make informed decisions based on it.<\/span> <\/span><\/p>\n This guide defines financial reporting, its contents, what it is compared to management reporting and why the contemporary <\/span>ERP systems<\/span><\/a> have become critical hardware in SMEs in need of proper and timely financial visibility.<\/span> <\/span><\/p>\n Financial reporting is the official procedure of generating standardised financial reports that indicate the financial operations of a company within some duration of time. These are statements in a generally accepted accounting framework, including <\/span>Generally Accepted Accounting Principles (GAAP)<\/span><\/a> or <\/span>International Financial Reporting Standards (IFRS)<\/span><\/a>, so that they are consistent and comparable.<\/span> <\/span><\/p>\n Financial reporting is mainly aimed at presenting clear, trustworthy information concerning the financial status, performance and cash flows of a company. The transparency has a multi purpose: it meets regulatory standards, helps to make investment decisions, makes the evaluation of credit easier, and allows the owners of the business to realize whether their company is profitable and creates sustainable value.<\/span> <\/span><\/p>\n The users of financial reports include different types of stakeholders with the following purposes:<\/span> <\/span><\/p>\n Management teams base their decisions on financial reports as well as more detailed management accounts in order to track the performance relative to budgets, detect variances, and correct operational plans.<\/span> <\/span><\/p>\n Full financial reporting is a number of related statements that disclose various facets of financial performance and position.<\/span> <\/span> <\/span><\/p>\n The income statement is a summary of the revenues, expenses, and profit or loss incurred during a certain time-period usually a month, quarter or a year. It indicates whether the business made profit in its operations by balancing the amount of money earned by the business against the amount of money spent in the business in a particular period. Some of the main elements are sales revenue, cost of goods sold, gross profit, operating expenses (salaries, rent and marketing) and net profit or loss after tax and interests.<\/span> <\/span><\/p>\n The balance sheet gives an overview of what is owned and owed by the company at a particular time. It obeys the basic accounting equation that is Assets = Liabilities + Equity. Current assets such as cash, accounts receivable, and inventory and non-current ones such as property, equipment, and intangible assets are all classified as assets. The liabilities include current liabilities like the accounts payable and short term loans as well as the long-term debt. Equity is the residual interest of the owners on the business, having deducted the liabilities.<\/span> <\/span><\/p>\n The cash flow statement will trace actual cash in and out of the business which are classified into three activities, namely the operating activities (cash generated by normal business activities), investing activities (cash outlay on or cash inflows on assets such as equipment or investments), and financing activities (cash outlay due to loans, equity investment or dividend payment). This is a statement which is critical as a profitable company may fail as it cannot stay without cash to fulfill its immediate obligations.<\/span> <\/span><\/p>\n Studies by U.S bank reveal that cash flow issues and not profitability have led to 82 percent of businesses failure<\/span><\/a>. This fact highlights the reason the cash flow statement is usually the most criticised statement among business proprietors and lenders.<\/span> <\/span><\/p>\n It is an expression that explains changes in the equity of shareholders over the period such as profit or loss, dividend paid, and share capital changes and other comprehensive incomes. It reconciles the difference between the opening and closing balance of equity in one balance sheet to the next.<\/span> <\/span><\/p>\n The notes give the necessary background, elaborations and disaggregations the core messages can not possibly express. They consist of accounting policies in use, large balance breakdown, contingent liabilities, transactions with related parties, and any other information that is required to have full picture of the financial position. In case of SMEs, the notes tend to describe how depreciation, inventory valuation schemes, and other major estimates and judgments will be prepared to make up the statements.<\/span> <\/span><\/p>\n This is important because SME owners should know the difference between financial reporting and management reporting since they are both necessary but confused by the owners.<\/span> <\/span><\/p>\n Financial reporting gives answers to the question “What happened? as standardised forms that can be compared between companies and years. Management reporting: What should we do about it? customised metrics, projections and operational insights that operate daily decisions.<\/span> <\/span><\/p>\n An SME can create statutory financial statements on a quarterly basis and create a weekly sales report, daily cash position report and monthly departmental performance review report to the management. They are both important, though they fulfill a completely different role.<\/span> <\/span><\/p>\n Financial statements are also a statutory requirement of most jurisdictions on the companies to prepare and submit financial statements, but the requirements depend on the size of the company, its structure, and industry.<\/span> <\/span><\/p>\n Under normal circumstances, SMEs are expected to prepare annual financial statements as per the accounting standards in existence. Such statements may need independent audit\/review, based on revenue levels, number of employees, or assets. Business entities are required to submit such reports to the regulators within stipulated periods of time, usually three to six months at the end of the financial year.<\/span> <\/span><\/p>\n Financial statements should reflect a fair and fair view of financial position and financial performance. False reporting may lead to regulatory fines, taxes, and a lack of trust by the stakeholders, not to mention the disqualification of directors. Maintaining audit-ready records refers to the full documentation, the existence of audit trails and any supporting materials to all material transactions.<\/span> <\/span><\/p>\n SMEs usually follow annual financial reporting periods in tandem with their financial year-end and this may be the same 12 months of the calendar year or a 12 months period. Tax, loan covenant, or investor reporting requirements may be in quarterly or monthly reporting. Reconciling accounts and other adjustments and the finalisation of the statements is the process that is usually initiated as soon as the period-end is over and that should be finalised within a specific period of time, so that the information would not be outdated.<\/span> <\/span><\/p>\n Poor financial reporting poses several threats. Regulatory fines and penalties may be caused by late filings or incorrect filings. Reported numbers may cause financial institutions to withdraw credit facilities or raise interest rates because they no longer trust reported numbers. Shareholders can lower prices or drop further investment. Perhaps most importantly, poor decision-making by management occurs with regard to the unreliable financial information, and this can even be fatal to the business.<\/span> <\/span><\/p>\n The concept of how daily transactions move into the ultimate financial statements can assist the SME owners to understand the importance of the system infrastructure.<\/span> <\/span><\/p>\n Any business that has financial consequences produces a transaction: sales invoices sent to the customer, purchase invoices received by the supplier, salaries paid to employees, bank transactions made, inventory received or eaten. Every transaction has a certain impact on certain accounts that is predictable.<\/span> <\/span><\/p>\n The records are maintained as journal entries which are based on the principle of double entry book keeping, this is that every transaction has a minimum of 2 accounts so that the basic accounting equation is preserved. An example of a sales transaction is that it leads to an increase in revenue (income statement) and an increase in either cash or accounts receivable (balance sheet). These journal entries are generated automatically by the modern systems depending on the type of transaction.<\/span> <\/span><\/p>\n Financial events do not always occur in discrete transactions. The period-end adjustments include depreciation of fixed assets, accrual of expenses that have not been invoiced, prepayment of expense that has not been consumed, and recognition of revenue, which has not been billed. Such modifications will make the financial statements include the reality about the economy but not only cash flows.<\/span> <\/span><\/p>\n The trial balance provides all the accounts with their existing credit or debit balances. Provided that the bookkeeping has been done in the right way, the total debits will be equal to the total credits. The trial balance is the basis of making financial statements and it assists in detecting errors in posting before report preparation.<\/span> <\/span><\/p>\n Financial statements are drawn based on the adjusted balance of the trial balance. The income statement takes revenue and expense accounts and determines the net profit or loss. The balance sheet is filled with asset, liability and equity accounts. The cash flow statement is made by analysing and classifying the movements of the cash account. The statement of changes in equity balances reconciles the opening balances, the profit\/loss and other transactions to the closing equity balances.<\/span> <\/span><\/p>\n This whole should be systematic, written and repeatable. Whenever done correctly financial statements are created as a natural extension of an ordered system of accounting and not a mad rush at the end of the reporting period.<\/span> <\/span><\/p>\n Enterprise Resource Planning (ERP)<\/a> systems that were initially developed as the tool of large-enterprise now could be viewed as the practical infrastructure of SMEs that require quality financial reporting.<\/span> <\/span><\/p>\nWhat Is Financial Reporting?<\/span><\/b> <\/span><\/h2>\n
Who Uses Financial Reports?<\/span><\/b> <\/span><\/h3>\n
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<\/a><\/p>\nWhat Is Included in Financial Reporting?<\/span><\/b> <\/span><\/h2>\n
Income Statement (Profit and Loss Statement)<\/span><\/b> <\/span><\/h3>\n
Balance Sheet (Statement of Financial Position)<\/span><\/b><\/h3>\n
Cash Flow Statement<\/span><\/b><\/h3>\n
Statement of Changes in Equity<\/span><\/b> <\/span><\/h3>\n
Notes to Financial Statements<\/span><\/b> <\/span><\/h3>\n
Financial Reporting vs Management Reporting<\/span><\/b> <\/span><\/h2>\n
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<\/p>\nFinancial Reporting Requirements for SMEs<\/span><\/b> <\/span><\/h2>\n
Statutory Obligations<\/span><\/b> <\/span><\/h3>\n
Importance of Accuracy and Audit Readiness<\/span><\/b> <\/span><\/h3>\n
Common Reporting Timelines<\/span><\/b> <\/span><\/h3>\n
Consequences of Poor Reporting<\/span><\/b> <\/span><\/h3>\n
How Financial Reporting Actually Works Inside a Business<\/span><\/b> <\/span><\/h2>\n
Step 1: Daily Transactions<\/span><\/b> <\/span><\/h3>\n
Step 2: Journal Entries<\/span><\/b> <\/span><\/h3>\n
Step 3: Period-End Adjustments<\/span><\/b> <\/span><\/h3>\n
Step 4: Trial Balance<\/span><\/b> <\/span><\/h3>\n
Step 5: Financial Statements Generation<\/span><\/b> <\/span><\/h3>\n
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<\/p>\nThe Role of ERP in Accurate Financial Reporting<\/span><\/b> <\/span><\/h2>\n
Centralised Financial Data<\/span><\/b> <\/span><\/h3>\n