What is Financial Reporting & Why is it Important?

Blog post

Financial reporting compiles a company’s financial information and presents it in a way that can be useful to stakeholders and decision-makers. Financial reporting comprises a variety of financial statements and company reports that, when taken together, paint a picture of the company’s financial health during a specific period of time – typically a year, quarter, or month. Business leaders use financial reporting to make decisions regarding the company’s direction, to formulate budgets, and to identify components of the business that are underperforming.

Financial Reporting Formats

Business owners utilize different types of financial reporting depending on their specific needs or what they are trying to achieve. The following are a few of the most important types of financial reporting:

Balance Sheets

Probably the most common type of financial report, the balance sheet provides a snapshot of a company’s financial situation on a given date. Classified balance sheets distinguish between current and noncurrent assets and liabilities.

Profit & Loss Report

Also called an income statement, the profit & loss (P&L) report is a popular way to present a company’s income, expenses, profits, and losses during a year or a quarter. That is in contrast to the balance sheet, which provides a summary of the company’s position on a specific date.

Cash Flow Statements

The cash flow statement focuses on how much cash is being generated as well as how it is being spent. This report indicates changes in cash levels during a period and it is often used by leadership to get a handle on spending and to help secure loans and other types of funding or investments.

Statement of Shareholder Equity

The statement of shareholder equity is used by businesses to track changes in retained earnings by shareholders and to report changes in shareholders’ accounts resulting from various activities. This type of financial statement also reports on equity withdrawals as well as dividend payments released to shareholders.

The Importance of Financial Reporting

Financial reporting provides insight into a company’s financial performance to shareholders, partners, and other key individuals and institutions. Using information gleaned from financial reports, stakeholders and decision-makers are able to make informed decisions regarding the business or their investment in the business.

Here are just a few of the reasons financial reporting is important for your business:

Tax Compliance

Without a doubt, one of the most important functions of financial reporting is that it helps ensure your business is tax compliant. Governmental agencies, such as the IRS and HMRC, use financial reports to gauge a company’s liability and ensure it is paying its fair share.

Investor and Creditor Reliance on Financial Reports

Potential investors want to know exactly how a business is doing before they make any decisions about investing. Financial reports are helpful to gauge the level of risk involved and to formulate an estimated return. Current stakeholders use financial reports to determine how the company has used their money and creditors can use financial reports to determine a company’s capital mix and overall financial position.

Sound Decision Making

Companies need to know where they stand financially before they can formulate reliable budgets or earmark money for the development of new products. Financial reports are also important in helping business leaders determine if they can expand operations or if they need to liquidate assets.

Fraud Detection

Accurate financial reporting is a proven way to detect not only accounting errors and oversights, but fraud as well. Discrepancies discovered in financial statements are often a red flag indicating illegal activity and can point auditors in the right direction to uncover the fraud and the person(s) responsible.


Financial reporting is not only a legal obligation, but also an important tool that can help business leaders and stakeholders:

When your financial data can be relied upon to be correct and complete, your financial reports can offer the same assurances. Implementing automation software can minimize the risk of potential human errors, helping ensure that your financial reports are sound. Learn more about how Trintech can help!