If businesses are living entities, then their accountants are doctors. Just as a doctor relies on a health prognosis to assess their patient’s wellbeing, accountants rely on strategic financial reporting tools to evaluate the financial health of a business. These tools are essential for understanding performance, identifying risks, and guide strategic decision making.
There are three core financial reports that form the foundation of financial analysis. The Balance Sheet provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time, revealing its financial position. The Cash Flow Statement tracks the inflow and outflow of cash over a given period, highlighting liquidity and the company’s ability to sustain operations. The Profit and Loss (P&L) Statement, also known as the Income Statement, summarizes revenues, expenses, and profitability over a defined timeframe. Together, these reports offer a comprehensive view of a company’s financial health and operational performance.
This blog helps businesses understand how financial reporting solutions are a key tool for smarter decision-making.
How Financial Reporting Solutions Lead to Smarter Business Decisions
Financial reports give a clear, honest look at a company’s financial health, performance, and position, making decision-making less guesswork and helping with strategic planning through practical insights. Here’s how they do that:
Determines Which Products or Services Should Be Scaled or Cut
The detailed company financial reporting on profitability and loss provides increased understanding of how well the business performs by Product, Service or Business Unit, and provides valuable information that is necessary for management to allocate additional resources to products/services that are yielding excess profits (margins) relative to the costs associated with their production, which allows for better informed decision-making on where to invest those additional resources.
At the opposite end of the spectrum, management can now identify poorly performing Products/Services and determine whether to discontinue or re-engineer them to improve the Company’s financial performance. By having this level of Financial Insight into each of the company’s Operational Areas, the Company’s Financial Reports will allow the Company to allocate its financial resources on operational areas with the highest levels of Profitability, and will assist the Company in taking corrective action and/or discontinuing operational areas with lower levels of Profitability and therefore their potential to grow in Profitability and provide long-term opportunities for continued growth.
Guides Pricing Decisions
The financial reports of a company provide the necessary Cost and Marginal Data to define an appropriate pricing strategy to be used for selling products or services. Financial reporting allows a company to determine what price point will give them the best competitive advantage and be competitive in the marketplace. When rising costs begin to choke out profit margins, the financial reporting allows companies to figure out the best course of action to increase prices while still maintaining their customers.
Improves Hiring and Workforce Planning
The cost of labor information provided in a company’s financial statements can provide valuable insights for the strategic decision of how to manage the labor force. Analytical calculations and comparisons between revenues and productivity will help determine whether a company should add more workers, whether employees should be outsourced to third-party firms, whether new hires should be assigned to specific departments, and/or how to assign existing employees to new departments. Understanding this information will help companies maximize their human capital resources, ensure they meet their business objectives, and create more efficiency in their daily operations.
Investment and Capital Allocation Decisions
Cash Flow Statements and Balance Sheets represent the financial strength of any business entity. A cash flow statement shows how a company’s business operations produced cash during a specific period of time, whereas a balance sheet shows how well a company used its cash flow statement to purchase and/or invest in inventory, products, buildings, machinery, etc., and obtain the necessary financial resources for continued growth.
A company’s ability to grow is directly related to the ability of that company to obtain new capital. Therefore, the cash flow statement and balance sheet are two of the most important documents that stakeholders review when considering making an investment in a particular company and its growth potential. By reviewing these documents together, stakeholders are able to provide more detailed input for making investment decisions, leading to better overall long-term performance.
Recognizes Cost Leakage and Inefficiencies
Keeping an eye on expense trends is important because once you find a trend of misallocation of funds within your organization, it offers the opportunity to review how you are utilizing your funds. By analyzing your spending during past months or years, you may be able to see any excessive fees charged by vendors that you may not have found otherwise. By using this information, you will be able to determine a more effective use of resources.
Furthermore, review of expense trends can also reveal operational inefficiencies that provide insight into opportunities to streamline operations in order to lower costs and increase profits. Therefore, expense trend analysis provides both insight into your financial condition and a framework for developing future strategic financial plans.
Optimizes Working Capital Management
For proper cash flow management, organizations must monitor AR, AP, and Inventory Reports. Companies that regularly evaluate these performance indicators can identify methods to decrease cash cycles, resulting in improved cash inflow and outflow processes. Faster customer collections and smoother vendor payments reduce the likelihood of financial-related challenges. Properly utilizing these reports minimizes or negates cash bottlenecks and maintains an organization’s liquidity for day-to-day operations. Overall, the use of these three reports combined, especially in the case of small businesses financial reporting, will enhance overall financial reporting and support an organization’s long-term growth plans.
Evaluates Customer Profitability
Financial Reporting gives the company an opportunity to analyze the different customer segments and contracts within customer segments to determine which of those segments are actually producing profit (revenue generation) and contributing to growth. Also, Financial Reporting will identify which of the company’s customers/contracts have a negative impact on the company because they are expensive to service, thus taking away resources. This information allows companies to better identify where to focus on their client-targeting and marketing efforts.
Supports Financing and Debt Decisions
Both Cash Flow Coverage Ratio and Debt Ratios are key indicators for both the business community and Financial Analysts to use in order to make appropriate decisions regarding financial strategies. Ratios are useful in that they will show whether the company is in a strong enough position to take on more borrowing or to refinance its old debt in a more favorable manner, or whether it is in the company’s best interest to wait before taking on additional lending due to possibly overextending itself.
An analysis of Cash Flow Coverage Ratios and Debt Ratios will enable your organization to gain a clear picture of its capability to service its existing debt obligations, manage risk in the Finance-related area, and increase its growth through sustainable means. Thus, this analysis will be a critical aspect of the development of your organization’s Strategic Financial Plan and the organization being prudent in its financial decisions.
Allows for Scenario Planning and “What-If” Analysis
By looking at past financial results, businesses can estimate the possible success or failure of different activities, such as entering a new market or increasing advertising spending. This analysis will help the organization identify the best investment opportunities and manage its resources to achieve the best possible return on investment. By taking a forward-thinking approach, using past results provides businesses with a means of minimizing uncertainty regarding how they will perform in the future, to help develop their strategic plan and maximize their potential growth and profits.
Measures Return on Strategic Initiatives
Additionally, organizations use historical financial performance to forecast how future initiatives will benefit them and how well they will perform. For example, digital transformations, marketing initiatives, and cost reductions are all analyzed through this process. The organization can measure and compare the performance of each initiative and determine which type of investment will yield the most beneficial outcomes. This information is also used to guide the organization in executing strategies and allocating capital resources.
Conclusion
According to IBM, “data-driven” decisions use data facts, trends, and analysis for a point of view when a company makes its strategic decision as opposed to only relying on gut instinct. There is truth to this statement because many business records include transactions, costs, revenues, and investments, creating a data bank that a manager must turn into actionable data intelligence.
Through the process of company financial reporting, the decision makers can interpret these numbers and convert them into actionable management insights. With respect to financial reporting (aside from being just a historical account), financial reports are a key component of developing and forecasting a company’s future; they solve a company’s opportunity lines against its goals based on its financial realities. For small businesses financial reporting serves as a huge lift during its growth phase.
