Financial Statements can be considered as the lifeblood of a company. It is something that a company cannot live without. It is a collection of reports that show financial information for prospective investors, current creditors and analysts to use in order to gauge the current financial standing of a company or business.
The more important ones are balance sheet, income statement, shareholders’ equity and cash flow report. These reports are based on daily bookkeeping.
Financial reports should be done accurately and not be doctored or padded to paint a different financial picture than what is actually being experienced. Those who come up with inaccurate and fraudulent reporting are setting themselves up for failure.
A company may have a lot of departments which have different functions. The common thread that links all these departments together is financial reports. Those in the finance department can be considered the “fiscalizers” of the company. They are the ones who will be able to discover anomalies in a department based on the financial audits.
Purpose Of Financial Reports
- Disclose information to managers of a company.
The figures that are reported in these financial statements will be the basis for major decision making, strategic planning and reversing failures. It tells the story of the company to the whole world. Managers can analyze statements in order to come up with the best decisions based on the current financial status. If there is a need to procure more assets, the reports can tell the manager if the deal can be done or not. A different approach can be used to solve this problem.
- Disclose information to investors and creditors.
This will help investors decide on whether to stay with the company or pull out their investments. Creditors will also have a basis as to approving pending loan applications and know as well if the company can afford to pay off their current loans. It can also be a tool used to raise additional capital, whether domestic or foreign.
- Disclose information to shareholders.
Those who own stocks and shares in the company no matter how large or small are co-owners of the business. The reports show vital information that company shareholders can use in order to either sell their shares or hold on to them.
Numbers will not lie, if done accurately reports can build trust with a company’s shareholders. Dividends can also be determined based on the overall situation of the company.
Reports will also show the current resources of the company and show how they are being utilized over a period of time. Procurement of new resources is also shown and a forecast on growth targets based on future acquisitions.
How management is performing can be reflected in the reports and this may have an impact on the voting of the board of directors for common stockholders. If shareholders see that there is a failure in management based on the reports then a change in leadership is one of the possible solutions.
- Disclose information for audit purposes.
Financial reports help companies comply with a lot of regulatory requirements. Filing these statements with government agencies are needed for compliance with the law. Corporate tax liabilities can be a huge expense. These reports can show why profit seems to be smaller than expected due to the tax burden. Proper management and planning can reduce tax liabilities.
Errors can also be discovered when books are not balanced. This will allow the company to discover possible internal wrongdoing in various departments. These costly mistakes can be dealt with earlier to avoid a bigger problem if left unchecked. If offenders are found guilty, they should be dealt with accordingly. A company can’t afford to have those in the Finance and Accounting departments to have credibility issues. It can make or break them in the long run.
Financial reports when done with transparency and accuracy is a vital tool for a business in order to reach its goals and targets. Decision making is done based on facts and figures and not on educated guesses. The financial health of a company can easily be determined just by looking at the figures presented. It will clearly show what direction the company is heading, is it going under or growing and expanding.