Financial reporting and analysis is a process that is done in all organizations regardless of size. For some companies, it is a tedious, painstakingly long process and for others, it is rather benign and tolerable.
Financial reporting and analysis produces the necessary financial statements as output and these financial statements are the not-so-secret weapon that investors use in their decision making.
Financial statements provide the means of measuring a company´s performance and management. These statements, while tedious to make for others, are necessary because investors use them to compare one company against another.
There are three primary financial statements- balance sheet, income statement, and cash flow statement. The balance sheet, of course, indicates the current financial performance of the organization; the income statement provides a summary of sales and profit over a specified period; and cash flow statement tells a story of how cash has been used and generated over a specified period of time.
It is worth noting that these outputs of financial reporting and analysis a.k.a financial statements are used by different types of investors in different ways. This means that that the amount of emphasis placed on certain parts of the financial statement is highly dependent on the consumer´s viewpoint and use of it.
For example – for an investor with growth strategy, he might be focusing on items that can drastically affect a company´s ability to generate future earnings. For a credit analyst, he might be focusing on cash flow and liquidity.
Regardless, producing honest and reliable outputs of financial reporting and analysis as well as understanding the meaning behind the figures found in financial statements are essential skills both for a finance personnel and for an investor.
The world of financial reporting and analysis is so complex that there are some things that are worth knowing. Here is a list of the top 5 must-knows about financial reporting and analysis.
- Financial Reporting and Analysis is so Diverse
Many people make the mistake of trying to find a one-size-fits-all approach when it comes to reporting. The truth of the matter is, it doesn´t exist and if it does, it won´t be very effective.
There is so much diversity to be found in financial reporting and analysis simply because of the diversity in the nature of business transactions or activities. This will subsequently result in diverse financial statement presentations.
This diversity can be especially found and felt in the balance sheets. The income and cash flow statements are not as susceptible.
- Accounting is Not a Science
A company is able to prove its financial performance and management through its financial statements and truthfully, these are all heavily influenced by educated estimates and judgments.
Despite the honesty of the management or the thoroughness of the auditors, what is good to know is that there is always a degree of inaccuracy or imprecision in these statements depending on the allowed upon degree of imprecision in the reporting and analysis process. This is why an investor or any consumer of these reports should take a skeptical stance.
- There are Different Ways of Reporting
There are two ways to prepare statements – Generally Accepted Accounting Principles and International Financial Reporting Standards. Both of these ways are accepted in the US even though GAAP is most commonly used. In contrast, Europe and most of Asia use IFRS.
IFRS basically is principle-based whereas GAAP is rule-based. Both have varying ways of reporting asset values, depreciation, etc.
- Pay Attention to the Notes to Financial Statements
Financial statements contain figures and it is very difficult to provide the full disclosure required by regulating bodies using just numbers. This is the reason why the notes to the financial statements are so important when it comes to evaluating a company´s position.
Accompanying notes in the figures are truly very crucial in the financial statements so make sure to pay special attention to them.
- A Superior Financial Reporting and Analysis Solution is Worth It
One of the many reasons why financial reporting and analysis becomes a pain for some companies to produce is because they do it manually in excel spreadsheets. In comparison, the best-in-class organizations choose to invest in a financial reporting and analysis software.
Financial reporting and analysis software like Performance Canvas by DSPanel not only streamlines the entire process, it also intelligently automates so that the reporting cycle time can be less than half of what it used to be.
In addition, financial reporting and analysis software like Performance Canvas has the ability to do commentary journalism where you can roll up comments, standardize the rules for reporting, and increase the level of accuracy when it comes to estimates or forecasts.
While it needs time and monetary investment in the beginning, the gains of having a specialized reporting and analysis software in place far outweighs the costs.
Performance Canvas believes in modeling business into the financial reporting solution because as mentioned, every business is unique. That being said, this financial reporting and analysis solution incorporates in it the latest best practices in financial reporting and analysis to make reporting standardized within the organization, faster, and more reliable.
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