When it comes to investing in a business most of the decision making process is based on the company’s financial reporting. This means that maintaining complete transparency in their reports is very important to both the corporation and its potential investors. They require as much information as possible about the corporate financial before they can decide on whether or not this would be a good investment.
What is Transparency?
In financial reporting, transparency is considered to be reports that have high quality and clear information which makes them easy to understand. The company’s budgeting and forecasting should be readily available for possible as well as existing investors to access and comprehend.
Why is Transparency Important in Financial Reporting?
When preparing reports there are companies that go to great lengths to mislead potential investors in order to be more appealing. It goes without saying that these companies should be avoided at all costs. Some companies ignore their knowledge of why it is necessary to be transparent in their financial reporting. Consequently, this makes them a significantly higher risk investment with the possibility of lower returns.
The best way to illustrate why it is important to be transparent in financial reporting is to use an example that involves two companies. Their shares have a similar market value and their financial leverage and total market risk exposure are about the same; as is their income, expenses and corporate financial. There is only one difference between them that market analysts take into great consideration when deciding which would be better to invest in. The first company is only involved in one business venture. Their financial reporting is very clear and the budgeting and forecasting easy to understand. The second company has overextended their reach and is trying to run several areas of business at the same time. Their financial reporting figures are complicated and off-putting. The decision of which company would be better to invest their money in would be made through the simplicity of the first’s financial budgeting and their reports.
It is important for companies to understand the psychology of their investors. This makes them realise that people are more likely to make investments in a company that has complete transparency in their financial reporting. When reports are opaque there is no sense of the actual risks or true state that the company is in. There is the possibility that the company is trying to hide the fact that it may be going bankrupt because of a surplus of debt. The corporate financial is an indicator of whether or not the business will be growing at a rate that makes investing in it worthwhile. If the evidence of its potential can’t be seen because of too many holding companies, it becomes difficult to evaluate possible growth on investments.
In conclusion, it becomes obvious that financial reporting should always be as transparent as possible. This is not only an indication of the company’s future growth, but plays a major role in investment decisions. Investors are a major part of any company and should always be taken into consideration regardless of any business venture.
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