Financial reporting is an essential process for businesses of all sizes. By tracking, analyzing, and reporting a business's results, the key stakeholders can make smart decisions about managing their business, like allocating resources and managing cash flow.

Financial reporting is a broad term that encompasses several different types of documents, including a company's financial statements. To put it simply, all financial statements are considered financial reports, but not all financial reports are financial statements.

Let’s delve into six best practices for financial reporting and analysis, how companies can shift from reactive to proactive, and the crucial role of budgeting and strategic planning in achieving financial success while staying on track with business goals.

What is financial reporting and analysis?

Financial reporting and analysis is the practice of gathering and evaluating financial data to assess a business's performance. This process provides insight into a company's revenue, expenses, assets, liabilities, and equity. Financial reports offer a comprehensive view of a business's financial health, enabling decision-makers to address the health and progress of the business.

What does financial reporting include?

Financial reporting typically includes:

• Monthly, quarterly, and annual reports
• Accounts receivable (A/R) and accounts payable (A/P) reports
• Periodic analysis

Monthly, quarterly, and annual reports: These reports include the income statement, balance sheet, and cash flow statement. They provide an overview of an organization's financial performance over a specified timeframe.

A/R and A/P reports: These reports contain data about invoicing and accounts payable with aging (how long it takes to collect revenue or pay vendors). They can include metrics and KPIs.

Periodic analysis: This type of analysis can include inventory audits, gross margin and/or gross profit analysis (by market, product, service line, etc.), compensation analysis, headcount analysis, or utilization analysis.

Now that you understand the basics of financial reporting and analysis let’s explore six best practices to help your business improve its financial reporting process.

6 best practices for financial reporting and analysis

1. Know the financial reports that are essential to your business

For many business owners, it can be overwhelming to know which financial reports to focus on. Creating a larger volume of reporting does not equal improved financial understanding. Getting a 50-page financial report does little to help a busy executive understand their business.

So, let’s break down the most important financial reports that every business owner or CEO should know and how they can help you make smarter decisions for your company's growth and success.

The five most essential and commonly referenced financial reports are:

• Income statement
• Balance sheet
• Statement of cash flows
• Accounts receivable (A/R) aging report
• Budget vs. actual

Income statement: An income statement, also known as a profit and loss statement, is a financial document that summarizes a company’s revenue, expenses, and profits over a specific period of time. The income statement is used to measure a company’s financial performance.

Balance sheet: A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It lists the company's assets, liabilities, and equity while showing how these elements are related (assets = liabilities + equity). The balance sheet is used to assess the company's financial strength and stability and its ability to pay debts and meet obligations.

Statement of cash flows: A statement of cash flows is a financial statement that provides information about a company's cash inflows and outflows over a specific period of time, typically a month or a quarter. The statement of cash flows is used to understand how a company is generating and using cash, which is critical for its short-term liquidity and financial stability.

Accounts receivable (A/R) aging report: An aging report, also known as an accounts receivable aging report, is a financial document that shows how long it takes for a company to collect payment from its customers. The aging report categorizes the company's accounts receivable into different aging buckets, such as 0-30 days, 31-60 days, 61-90 days, and over 90 days, then summarizes the amount of money the company is owed in each category. The aging report is used to manage the accounts receivable process and to assess the risk of bad debt. By analyzing the aging report, a company can identify which customers are paying on time and which are falling behind, allowing it to take appropriate action to improve cash flow and reduce the risk of bad debt.

Budget vs. actual: Budget vs. actual reporting, also known as budget variance analysis, is a financial management tool that compares a company's actual financial performance to its budgeted or planned performance. The objective of budget vs. actual reporting is to identify variances between actual and budgeted results and then analyze the causes of these differences. By analyzing budget variances, a company can identify trends, improve planning and budgeting processes, and make informed decisions to improve its financial results.

Budget vs. actual reporting typically includes the following elements:

• Budget or planned results: This is the amount of revenue, expenses, and other financial results the company planned to achieve during a specific period of time.
• Actual results: This is the actual amount of revenue, expenses, and other financial results that the company achieved during the same period of time as the budget.
• Variance analysis: This is the process of comparing the budgeted or planned results to the actual results to identify variances and analyze the causes of these differences. Variance analysis helps the company understand why its results differed from its expectations and provides information for adjustments and improvements.

Ensuring that the data from these financial reports is accurate is essential for business owners to make smart decisions about the direction of the company. If financial reports do not provide actionable insights, Citrin Cooperman can help determine what needs improvement in your accounting and financial reporting.

2. Implement GAAP accounting principles

The Generally Accepted Accounting Principles (GAAP) is a set of guidelines and rules widely used as a framework for financial reporting in the United States, providing a common set of standards for entities to prepare and present their financial information consistently and transparently. These principles are established by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).

GAAP includes principles like:

• Historical cost principle: Assets and liabilities are recorded at their original cost.
• Full disclosure principle: The financial statements should disclose all relevant and material information
• Matching principle: Expenses should be matched with revenues in the period they were incurred.
• Revenue recognition principle: Revenue should be recognized when earned, regardless of when payment is received.
• Objectivity principle: Financial statements should be based on objective evidence.
• Consistency principle: Companies should use the same accounting methods from one period to the next.
• Conservatism principle: In case of uncertainty, the financial statement should reflect the worst-case scenario.
• Materiality principle: The financial statements should include only information that is significant enough to affect users' decisions.
• Fair presentation principle: Financial statements should be presented in a way that is not misleading.
• Cost-benefit principle: The benefits of providing information should outweigh the costs.

GAAP aims to ensure that financial statements are consistent, comparable, and reliable, which helps businesses make smarter decisions about their financial health.

3. Follow the ‘four C’s’ of good data

Another best practice for financial reporting is to ensure that the data used for reports is accurate and timely. This means that the data follows the four C’s: correct, current, complete, and consistent.

By ensuring that the data meets the four C’s, businesses can guarantee their financial reports are reliable, increasing credibility and trust among stakeholders.

Use of technology to streamline the reporting process

By using technology to streamline the financial reporting process, companies can improve the four C’s of their financial reporting. A company can use technology to streamline the financial reporting process in the following ways:

• Automate data collection and entry: Using financial management software to automate the collection and entry of financial data can reduce the risk of errors and save time.
• Real-time reporting: Advanced technology solutions can provide real-time financial reporting, allowing companies to make informed decisions quickly.
• Data visualization: Technology can help companies present financial data in a clear and visually appealing way, making it easier to understand and analyze.
• Cloud-based solutions: Cloud-based financial management systems allow for secure access to financial data from any location on various devices, making it easier for teams to collaborate and share information.
• Integration with other systems: Integrating financial reporting systems with other business systems, such as sales and purchasing systems, can provide a more comprehensive view of the company's financial position, reduce double entry, reduce errors, and save time.

Keep processes simple and consistent

By reducing process complexity, businesses can improve the four C’s of their financial reports, which ultimately helps to make informed decisions about the business's financial health.

Processes should be documented to ensure consistency, understanding, and efficiency. Documenting processes provides a clear and consistent understanding of how tasks will be performed, reducing the likelihood of misunderstandings and errors. Once processes are documented, a company can move to process improvement.

4. Establish monitoring and reporting frequency

Accounting management establishes a consistent monitoring and reporting frequency for accurate financial reporting. This includes setting regular intervals for recording financial transactions, such as daily or weekly, and for compiling and analyzing financial data, such as monthly or quarterly.

By doing so, business owners can have confidence that their financial records are accurate and up to date, allowing for more effective decision-making and forecasting.

Additionally, setting a regular reporting frequency helps to identify trends and patterns in financial performance and can aid in identifying potential issues or areas for improvement.

5. Implement performance analysis and benchmarking

Performance analysis is the process of evaluating the performance of an organization, business unit, product, etc. The goal of performance analysis is to identify areas of strength and weakness and to understand how performance can be improved. It typically involves gathering data, analyzing the data, and presenting the results in an insightful way.

Benchmarking is the process of comparing the performance of an organization, business unit, product, etc., against standards of excellence or best practices within the industry. Benchmarking provides a way to measure performance against a standard and identify areas for improvement. Benchmarking can be used to evaluate various factors, including cost, quality, productivity, and customer satisfaction.

Performance analysis and benchmarking are often used together to provide a comprehensive performance view and identify areas for improvement. By comparing performance against industry standards and best practices, companies can make informed decisions about their operations and strategies to improve their overall performance.

In addition, regular performance analysis and benchmarking allow companies to monitor their progress over time, making it easier to track and identify areas where they need to improve. This leads to increased accountability within the organization.

6. Create clear summaries and explanations

For busy company leaders, the financial reports they receive must provide valuable insights that aid in decision-making. Creating clear summaries and financial analysis is essential for financial reporting. Accounting and financial leadership should present the most important data in a simple and direct way, using clear and concise language, providing summaries at the start of the report, and using charts, tables, and graphs to present key data.

It is also important for accounting and financial leadership to explain any data or figures in the report to help company leaders understand the context and significance of the information. This way, stakeholders can understand and use the financial reports effectively, which helps make informed decisions about the business's financial health.

Financial reporting and analysis is a crucial process for businesses of all sizes to track, analyze, and report their financial performance. By understanding the importance of budgeting, strategic planning, and key financial reports and statements, business owners can shift from a reactive to a proactive approach and make informed decisions about managing their business.

At Citrin Cooperman, we customize the right solution for your business to get the accurate, relevant, and timely financial reports you need to run your business successfully. Learn more here.