What is Financial Reporting and Why is it Important?

Financial reporting is an essential function of any Finance organization. It provides key stakeholders with a detailed snapshot of financial performance to help inform future decisions. Financial reporting and any related analysis of financial results are important for many Financial Planning & Analysis (FP&A) departments, offering data on the economic health of the business as a whole.

With a range of beneficial capabilities, the financial reporting process is crucial when it comes to evaluating and selecting a software package to support FP&A as well as the Accounting team. Let’s take a closer look at what this function is and why it’s so important.

What is Financial Reporting?
Why is Financial Reporting Important?
Key Stakeholders and their Financial Reporting Requirements
The Financial Reporting Gap
Reporting and Analytics in CPM Software

What is Financial Reporting?

The financial reporting process provides stakeholders an accurate depiction of the finances of an enterprise, including its revenues, expenses, profits, capital, and cash flow. The enterprise could be a private or public company, non-profit, government agency, higher education institution, or other organization.

The primary financial statements that are produced through the financial reporting process include the following:

Balance Sheet – Provides a consolidated view of the assets, liabilities, and capital of the enterprise at a specific point in time. The balance sheet is typically produced at month-end, quarter-end, and year-end.
Income Statement – Also known as profit and loss, an income statement is a financial report that summarizes the enterprise's income, expenses, and profits or losses over a specific period of time. Income statements are typically produced for a specific month, quarter, full year, or on a year-to-date basis.
Cash Flow Statement – The cash flow statement summarizes the amount of cash that the enterprise has generated (sources) and how the cash is being spent (uses). It contains elements of both the income statement and the balance sheet, and it is critical to the successful financial management of an enterprise.

Why is Financial Reporting Important?

There are a range of benefits of financial reporting, which is why it’s one of the most crucial aspects of any business. It provides transparency and accountability about a company’s financial health, while ensuring adherence with any law or compliance requirements. By disclosing financial performance, stakeholders and investors can evaluate profitability, liquidity, and solvency to make more informed decisions.

Key Stakeholders and Their Financial Reporting Requirements

External Stakeholders

A financial report needs to inform and serve the needs of a variety of stakeholders. This can include external investors, owners, bankers, public markets, regulators, and boards of directors. They all need to understand the financial performance of the enterprise to guide investment decisions, levy taxes, ensure compliance, and provide advice to executive management.

External stakeholders are typically most interested in the key financial statements mentioned above , as well as supporting details, schedules, and commentary (e.g., management discussion and analysis) about the financial performance of the enterprise.

Internal Stakeholders

Financial reports are also essential tools for informing internal stakeholders about the financial performance of the enterprise. This can include the CEO, CFO, and senior management team, as well as managers across the enterprise who need to understand how their particular subsidiary, department, business unit, or function is performing in relation to the overall enterprise.

Internal stakeholders are typically most interested in the consolidated income statement of the enterprise, as well as profit and loss reports for their specific area of responsibility. This is where financial reporting expands to include financial analysis which is delivered as part of internal management reporting. It may include the following:

Comparisons of the financial results to the original budget for the period showing positive and negative variances that should be analyzed.
Comparisons against prior period performance (e.g., prior quarter or same quarter in the prior year)
Comparisons of revenue, expenses, and profit or loss across subsidiaries, business units, departments, or product lines.

Figure 1 – Interactive Executive Dashboard The form these internal financial management reports may take can vary based on the preferences of the internal stakeholders. Some may prefer printed financial reports or books of reports. Some may prefer electronic access to financial reports via email delivery, while others may prefer to review financial results through an interactive dashboard (see figure 1), with the ability to drill into key performance indicators (KPIs) or values on financial reports. Financial and operational analysts may prefer to have access to financial and operational results via an Excel spreadsheet so they can slice and dice the data and perform scenario analysis as needed.

The Financial Reporting Gap

Given the demanding requirements of internal stakeholders when it comes to financial reporting and analysis, you might be wondering how well enterprises are doing in meeting the needs of this audience. Unfortunately, despite the explosion of data across organizations, many still struggle to meet the information requirements of executives and managers because they don't have the right tools for the job.According to the FSN Future of Analytics in the Finance Function survey from 2020, only 14% of Finance leaders consider their reporting and analytics insightful. That means 86% of reporting and analytic effort is missing the mark. Why? Because most enterprises are relying on fragmented silos of spreadsheets, legacy ERP and corporate performance management (CPM) software, data lakes, and BI tools for their reporting needs. This forces Finance teams to build disjointed processes around their technology.

Reporting and Analytics in CPM Software

Today's modern CPM software solutions offer a number of advantages over legacy CPM solutions. They are most often deployed in the cloud enabling faster time to benefit. They offer specific functionality designed to address the financial close, consolidation, planning, reporting, and analysis needs of enterprises. And most include robust, built-in reporting and analysis capabilities. If this isn't part of the CPM solution you are selecting, then you'll need to augment the solution with 3rd party BI and reporting tools.

Figure 2 – OneStream's Intelligent Finance Platform For example, with a broad range of reporting and analytics capabilities, OneStream helps reduce reliance on spreadsheets and fragmented reporting tools to increase the speed, scope, and accuracy of reporting across the organization. OneStream's Intelligent Finance Platform (see figure 2) unifies finance processes across the office of the CFO while enabling the organization with self-service, easy-to-use financial reporting software for a variety of stakeholder groups. OneStream's reporting and analysis capabilities include the following:

Guided Reporting for rapid creation of financial statements
Production Reporting for pixel-perfect operational reporting
Interactive Dashboards with sophisticated data visualizations
Analytic Blend engine which combines detailed operational data with summarized financial data so managers can identify daily and weekly trends and financial signals
Microsoft Excel® integration for data entry, reporting, and analysis
Microsoft Office® integration including Word and PowerPoint

Learn More

The financial reporting function is essential for both Accounting and FP&A functions. These capabilities are an important factor to consider when enterprises are evaluating CPM solutions for financial close, consolidation, planning, and forecasting.

Over 1,400 enterprises have chosen OneStream's unified Intelligent Finance platform to support their financial close, consolidation, planning, reporting, and analysis requirements. We deliver timely, accurate financial and operational results to internal and external stakeholders. To learn more, check out our interactive eBook and contact OneStream if we can be of assistance.

Did you know OneStream also offers a weekly live demo webinar every Friday for 1 hour on a specific topic? Check out our resources library.

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FAQs on Financial Reporting

Financial Reporting vs Accounting: What’s the Difference?

While financial reporting and accounting are closely related, they perform two different functions. Accounting collects and stores data such as receipts and invoices, whereas financial reports analyze data to give valuable insights into the financial position of an organization.

What is the Objective of Financial Reporting?

The objective of financial reporting is to provide stakeholders with accurate and comprehensive information about a company's financial performance and position. This transparency enables informed decision-making, ensures regulatory compliance, enhances investor confidence, and supports effective resource allocation and strategic planning.

What are the Benefits of Financial Reporting?

Good financial reporting can help to optimize your business in a number of ways, offering a wealth of benefits including:

Transparency: Delivers a clear view of your company's financial health, ensuring accountability to stakeholders.
Informed Decision-Making: Helps investors and creditors make informed decisions by providing detailed financial information.
Regulatory Compliance: Ensures adherence to legal and regulatory standards.
Stakeholder Communication: Provides crucial financial insights to employees, customers, and other stakeholders, fostering trust.
Risk Management: Identifies potential financial risks, enabling proactive management.
Strategic Planning: Supplies data for setting goals, allocating resources, and developing business strategies.
Benchmarking: Facilitates comparison with industry peers to identify strengths and opportunities for improvement.

What are the Uses of Financial Reporting?

Financial reporting offers a clear view of a company's financial health, helping stakeholders make informed decisions. It ensures transparency, regulatory compliance, and investor confidence while aiding in performance evaluation and strategic planning. It also helps identify trends, manage risks, and ensure efficient operations.

Who are Financial Reports Used By?

Financial reporting is useful for a number of areas within a business. As such, many people may need access to your financial reports, including investors, shareholders, creditors, employees, lenders and management.