Businesses always prepare financial reports, but do you know why? Here are the reasons that will tell you why businesses make an effort in preparing financial reports.
Financial reports disclose and summarize the financial information and performance of a particular company over a specific period of time. These reports usually include the external financial statements of the company, even the quarterly and annual reports made to stockholders, or the financial reports given to government agencies. These financial reports are usually made to relay relevant information to the users of the said financial reports.
Other than the purpose of relaying financial information to users, preparing financial reports is also important to the management itself since it ensures business success for the following reasons:
- It helps determine the financial condition of the company.
Knowing the financial condition of a company is relevant since it will help the management determine whether the business is still capable of earning revenues for the next consecutive years. Financial statements are the best example of a financial report that shows the financial condition or performance of a company. Moreover, the owners and other stakeholders would want to know whether the money that they had invested has already achieved growth. Hence, it is important to prepare these financial statements annually, at most, to provide the owners and stakeholders the necessary financial information.
- It helps identify any errors or fraud in the company.
Preparing financial reports also involves the auditing process, wherein material misstatements resulting from errors and frauds can be identified. Identifying these errors and frauds is vital since these will hinder the company from reaching growth. The management should ensure that errors and frauds are not present in the company in the future years of operation.
- It helps in the planning and decision-making process of the company.
Given that financial reports help the management identify errors and frauds or provide the management with financial information regarding the company; it will allow the management to create plans and decisions that will be beneficial for the company, using the information that was obtained from the financial reports. For example, they have identified fraud among certain employees within the company, the management can now decide on what to do with these employees to prevent a similar situation from happening in the future.
Considering that these financial reports are crucial in determining the success of a business, it is important to carefully decide and employ professional and knowledgeable people and systems since it takes a lot of time and effort to prepare these reports. An example of a good accounting system to use is the AccuBooks Accounting System that was developed by Ally Techno Grit Solutions, which aims for business owners to create and check their financial reports.