Important Aspects of Financial Reports That Every Business Should Know

As a business owner, you may have delegated various matters to the staff working for you. Nevertheless, there are several important things that you should know how to do yourself as well. One of which is creating financial reports. Although it is true that you can entrust this to your financial staff, it would be very beneficial if you also knew how to create financial reports and the various aspects that they relate to, because the ability to create and read financial reports closely relates to the growth of your business.

In a company of any size, the existence of financial reports is crucial, as they allow you to understand the inflow and outflow of money within a company in detail. By creating a company’s financial reports, you can assess the financial condition of your business over a specific period; ranging from the sources of income, expenditures, debts, receivables, and the overall assets of your company. Moreover, if you fully comprehend financial reports, as a business owner, you can gain a deeper understanding of the overall financial health of your company and acquire valuable insights to make better decisions for the future.

Now, to help you further understand the ins and outs of financial reports, let's delve into the discussion below.

The definition of financial reports 

Financial reports are a collection of financial information from a company within a specific accounting period, which are aimed to depict the performance and financial situation of a business. As a highly important document for the continuity of a business, a financial report contains various relevant information about the financial performance of an organization or company. In this context, financial reports become the primary tool examined when analyzing financial stability, operational efficiency, and costs, as well as company growth.

Generally, financial reports typically consist of three main components: the income statement, the balance sheet, and the cash flow statement. These three elements provide a comprehensive overview of the financial health of a company. By examining the financial analysis outcomes generated by the company's financial reports, your company can take sustainable steps that will be beneficial to your business.

The functions and benefits of financial reports

So, what are the functions and benefits of financial reports for a company? See below for a few examples. 

To evaluate financial performance

Through financial reports, you as a business owner and stakeholders, such as investors and management, can conduct in-depth evaluations or financial analyses of the company's performance. With the information contained within the financial reports, such as net profit reports, revenues, and financial ratios, you will possess a powerful tool that can be used to gauge whether the company has managed its finances effectively. From this financial analysis, you can gain a comprehensive perspective that can help to identify the successes and failures of the strategic steps taken and provide a foundation for better future business decisions.

Running an open and ethical business 

Company financial reports play a crucial role in fulfilling business responsibilities openly and ethically. Through the presentation of accurate and transparent financial information, financial reports establish transparency and accountability in managing company resources. By providing access to stakeholders, financial reports build trust and offer an objective insight into the company's financial performance, while also helping to make sure management is responsible for decisions that are made and actions that are taken.

Fulfilling legal requirements

Did you know that financial reports are also crucial to meet legal requirements? There are numerous legal regulations that mandate companies and organizations to compile and submit financial reports in accordance with the applicable accounting standards. Conducting comprehensive financial analysis is also valuable for adhering to legal rules and regulations, particularly for companies aiming to go public on the stock exchange.

5 important terms related to financial reports

After understanding why financial reports are crucial, you also need to comprehend the meanings of various important terms within a financial report. Have you ever heard of the term "financial statement" or a "cash flow statement"? Perhaps these terms are not unfamiliar to you, but do you know what they actually mean? Check out the explanations below.

Bookkeeping

​​Bookkeeping is a systematic and useful series of records to gather financial information about a company. It includes assets, liabilities, equity, income, expenses, as well as the recorded value of goods or services.

General ledger 

A general ledger is a record-keeping book used to record various financial transactions of a company within a specific period. Its purpose is to facilitate internal and external financial management. As a business owner, you need to oversee balances, as well as credit and debit transactions, which will later be useful in obtaining a comprehensive overview of all ongoing business activities. 

Gross Profit & Net Profit

In financial reporting, the term "gross profit" refers to the income that has been from sales, which is the sales revenue before being deducted by costs such as production, employee salaries, taxes, and interest payments. Therefore, in a financial analysis, gross profit cannot yet be considered as the pure profit from sales, while  "net profit" is the pure profit that already includes the company's costs and expenses.

Balance sheet

A balance sheet is a required report for a company to reflect its financial condition. Broadly speaking, a balance sheet consists of three components: equity, total assets or wealth, and liabilities or debts held by a company.

Cash flow statement 

A cash flow statement refers to a type of financial report consisting of the inflows and outflows of cash within a company over a specific period. Its main purpose is to provide an overview of the sources of a company's income and how that money has been spent. A well-prepared cash flow statement also has other benefits, such as ensuring that your business has sufficient funds to carry out its operations.

Different types of financial reports that a company must have

From all the terms listed above, there are a few different types of financial reports and financial analyses that a company must generate. Let’s see a short description of each one below..

Income Statement

A report that details a company's revenues and expenses over a specific period, ultimately outlining the net profit or loss incurred.

Balance Sheet

A report depicting the financial position of a company at a specific point in time by comparing assets, liabilities, and equity.

Accounts Receivable Report

A report that records the amount of money a company is owed by customers or other parties for products or services provided.

Accounts Payable Report

A report that records the company's financial obligations that need to be paid to various parties, such as external vendors or other entities for goods or services received.

Financial ratio analysis and how to read a financial report

Now that you have learned several aspects that are related to a company's financial statements, the next step is to gain an understanding of a financial ratio analysis. Financial ratio analysis is an approach used to assess the financial performance of a company by comparing various figures in the financial statements. Some examples of financial ratios are:

• Liquidity Ratio: it is divided into three kinds, which includes Current Ratio, Quick Ratio/Acid Test Ratio, and Cash Ratio. 
• Profitability Ratio: a ratio that shows the capability of a company to gain profit. The profitability ratio is measured by several ratios, such as Operating Income Ratio, Earning Power of Total Investment, Return on Equity,  Return on Investment, and Return on Net Worth. 
• Solvability Ratio: aimed to measure the level of fund management and a company's ability to meet its long-term obligations.
• Activity Ratio: measure whether the company has been effective in managing its resources or not. 
• Investment Ratio: a ratio that measures the company's ability to provide returns to those who have invested funds in your company, particularly investors.

Meanwhile, financial statements will not fulfill their function properly if they cannot be read and interpreted correctly. Learn how to read two types of financial statements below.

How to read a balance sheet

When reading the Balance Sheet, you can assess the extent of a company's wealth. This includes the amount of cash, bank accounts, accounts receivable, and so on. When a company has sufficient funds to meet its day-to-day operational needs, fulfill its obligations such as paying debts to vendors and banks, provide dividends to shareholders, maintain inventory both as raw materials for production and finished goods for sales, and has adequate facilities and resources to support smooth company operations, then the company can be considered financially healthy.

How to read an income statement

When reading the income statement, there are a couple of things to pay close attention to:

• Comparison between revenue and Cost of Goods Sold (COGS)
• Pay attention to the expenses and revenues of the company. You can compare the data with data collected in previous periods — for example, in past months or years.

Aspire is here to help you with your financial reports

Creating financial reports is not an easy task. The numerous details that need to be recorded and processed meticulously can divert your focus from the actual business goals. In this regard, Aspire can be one of the tools that simplify and shorten the process of creating financial reports in your company. How can it be done? There's an accounts receivable management feature that helps you receive payments faster; you can easily create, send, and manage invoices, as well as send payment reminders to clients. You can also view all this with automatic reconciliation. Additionally, there's an accounts payable management feature that streamlines the bill payment process, allowing you to control and monitor cash flow transparently. All invoices can be consolidated in one place, making record-keeping easier and minimizing potential human errors.

What’s more, is that there's also an integration with various bookkeeping software such as Oracle, NetSuite, and Xero, which streamlines the closing process, enables intelligent categorization, and offers advanced synchronization for all expenses along with their receipts. This significantly shortens the financial reporting process.

Not only that, there are still more attractive features from Aspire that can simplify your business management. Starting from Aspire's corporate card which can be used to purchase various company needs, to the unlimited 1% cashback program, which is an additional benefit for companies that join Aspire. In this program, every time you or your employees make purchases at various leading merchants in the world, there will be a 1% cashback without transaction limits! This enables companies to be more cost-effective and can increase profits for your company.

Even though you now understand how to create financial reports, you can make the process even easier by using Aspire, where you will get a comprehensive and efficient financial solution to simplify your company's financial management in a quick, smart, and easy way. For those of you who want to gain interesting insights into business financial management and guidelines for running other companies, feel free to read more on the Aspire blog.