What Is Financial Reporting? A Quick-Start Guide

Jason Torres, Senior Credit Analyst, First Republic Bank
November 22, 2021

  • Financial reporting is the process of thoroughly recording and tracking a business’s financial activity.
  • Financial reports collect and present information that’s essential not only to business owners, but to investors, regulators and other key stakeholders, too.
  • Four common financial reports include income statements, balance sheets, statements of changes in equity and cash flow statements.

A strong financial reporting system comprises different types of financial statements to provide a picture of where a business stands financially.

Understanding your finances as a business owner is essential to running a successful company with longevity. However, not every business owner has the same amount of financial reporting knowledge. Gaining familiarity with different financial reports — including the income statement, balance sheet, statement of changes in equity and cash flow statement — is key to understanding the financial health of your business.

Learning about each type of financial report can position you to find opportunities, spot warning signs and, ultimately, maintain a healthy and profitable business, in both the short and long term.

Financial reporting definition

Financial reporting is the process of using financial statements to record, track and determine a company’s financial performance over a period of time. Reporting tracks funds coming in and going out of the business.

The time period encompassed by a given financial statement can vary from weeks to several years, depending on how you’d like to track your business’s financial performance, and what you seek to gain from the reports. It’s up to you as the business owner to decide the best timeline based on these considerations.

Ultimately, financial reporting is a strong way to paint a clear picture of your company’s financial health and its ability to grow.

Why is financial reporting important?

A strong financial reporting system is likely crucial if you're looking to build a solvent business that can take you to new heights. 

Without a strong financial reporting system, your small business could experience major problems. You may miss warning signs of upcoming financial issues to the detriment of your company. On a larger scale, a lack of detailed financial reporting could even ruin potential investment opportunities. 

For business owners, a combination of well-prepared financial statements is one of the best ways to correctly gauge risk, success and opportunity. Ultimately, understanding your company by the numbers helps set up your small business for future success via the following key benefits. 

Enables at-a-glance business performance monitoring 

Financial reports provide a detailed glimpse into the health of a business, enabling insight into key figures to understand the business’s performance. In turn, these figures can help in making more informed decisions, whether to address pain points or to promote growth.

Gauges business value

Financial reports don’t always list the value of a business directly, but they often outline crucial details, such as assets, liabilities and profit projections, that factor into business valuation.

Entices investors

Often used to forecast a business’s financial future, financial reports grant investors visibility into the granular details of a business’s money matters. Approaching investors without meticulous financial reports is unlikely to instill the confidence required to secure funding.

Helps ensure compliance with applicable laws and regulations

Businesses face a plethora of regulations implemented by the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), the Financial Accounting Standards Board (FASB) and other entities. Thorough financial reporting can make it easier to ensure company-wide compliance.

It’s also important to note that financial reports themselves must typically comply with Generally Accepted Accounting Principles (GAAP), an extensive collection of accounting standards established in the U.S. by the FASB.

Offers transparency to stakeholders

Beyond investors and business owners, financial reporting allows other interested parties, like employees, to better understand the health of a given business.

Main types of financial reports

Within financial reporting, there are multiple types of financial statements. These financial statements — also commonly referred to as “financial reports” — show a company’s financial data and activities.

Companies commonly use four main types of financial reports: income statements, balance sheets, statements of changes in equity and cash flow statements. Each type of financial statement is a crucial part of the full story financial reporting can tell about a small business.

All of these financial reports can be audited by accounting firms, independent accountants or the government, so it's important to understand the purpose of each report:

Income statement

An income statement includes all income and expenses generated by your business over a chosen period of time. With this financial report, businesses can see the impact of revenue, gains, expenses and losses. Income statements are often prepared at regular intervals, like quarterly or annually, in order to reflect financial trends and comparisons over time.

Also known as profit & loss statements (or P&L statements), income statements are one of the most common financial statements business owners use and one of the most common financial reports requested by lenders and investors. They’re also one of the most critical statements for accurate financial reporting.

Income statements help you determine your business’s financial health, and enable you to pinpoint future opportunities, spot potential issues and set future goals.

Balance sheet

A balance sheet lists and tallies your company’s assets, liabilities and equities, all of which speak to what a business is worth on the given “reporting date,” when this financial information is prepared. Balance sheets are often drawn up on a quarterly or monthly basis.

For business owners, balance sheets are important financial reports because they can help show whether a business is succeeding or failing. Based on the balance sheet, companies can make adjustments to correct issues, such as reducing expenses, increasing profits or strengthening their debt-to-income ratio. The sheet can also be used to determine whether the owner should continue to invest in the company.

For people reviewing a balance sheet outside of the company — for instance, an investor or financial institution — the balance sheet provides important insight into the business’s financial health.

Statement of changes in equity

A statement of changes in equity shows how your company’s retained earnings have changed during a specific period — often monthly, quarterly or annually. This financial report is structured as an equation: It begins with the retained earnings (amount of profit after all expenses, taxes, and dividends) from the beginning of the chosen reporting period, adjusts for items such as net income and dividends and closes with the retained earnings balance for the period. Since it's an ongoing process, it's key to create a financial report immediately so you can properly track earnings and equity.

Statements of changes in equity — also called “statements of retained earnings” — can help business owners and other key stakeholders understand how and why equity is changing over a certain period of time. Mostly, however, this financial report is generally prepared for outside parties like investors and financial institutions. Statements of changes in equity are often appended to an income statement (P&L statement) or balance sheet.

Cash flow statement

A cash flow statement shows how cash is going in and out of your company during a given reporting cycle. Most often, businesses prepare these statements over a short period, such as a month. Typically, cash flow statements include operating, investing and financing activities.

Cash flow statements help you see how much cash different types of activities generate, and enable you to make decisions about how to allocate cash in the future. Importantly, cash flow statements can help you and outside stakeholders understand the phase of your business. For instance, they can help demonstrate whether it’s growing rapidly or slowly, and if it's in transition or in decline.

Having a strong understanding of a statement of cash flow can also aid in your ability to anticipate future cash needs and seek the appropriate financing or investment in a timely manner.

Build your business strategically

Whether you’re pulling together your first-ever business continuity plan or gearing up for an investor presentation with your latest startup, financial reporting could prove crucial on the path to business success. As you dive into the world of business finance, keep these tips in mind:

  • Automate reporting with financial software: Modern programs can help minimize the effort required to make day-to-day business decisions while also helping to ensure you’re more prepared to face tax season and be in compliance with key regulations.
  • Establish a rigid reporting process: A clearly defined process helps promote consistent reporting while ensuring alignment across departments.
  • Start immediately: Financial reporting tends to be an essential element of any business plan, regardless of size or growth stage.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.