Financial Reporting: What You Need to Know [2022 Guide]
In the world of modern business, financial reporting is a vital component to ensuring your business is consistently scaling. Having regular access to updated and accurate financial statements is critical to helping you track your company’s metrics – and putting on the path to success.
Failing to stay updated on the financial health of your business makes it incredibly difficult for you and your staff to make the right decisions about keeping it strong, and helping it grow to new heights. Making sure that your financial reporting is precise and published on time is also a must to comply with Australia’s strict corporate compliance regime.
If you’re running a business in 2022, keep reading. We’ll outline everything you need to know about financial reporting, the main types of financial reports and why publishing consistently accurate financial statements is critical for a successful modern company.
What is financial reporting?
Financial reporting refers to the tracking, analysing and reporting of income generated by your business. The underlying purpose of financial reporting is to understand your cash flow, your business performance, how efficiently you’re using your current resources, and to give your business a financial health check.
The ultimate objectives of good financial reporting are to:
- Deliver information to your investors. The people and companies investing in your business will want to know exactly how your cash is being used. They’ll want to know you’re spending it efficiency and reinvesting it wisely. Good financial reporting will help them know if your business is worth sticking with financially.
- Track your cash flow. A financial report can help you know where your money is coming from and where it’s going. It’ll help you identify your key drivers, find out how well your company is doing, and whether you can meet your debts (thereby allowing you to scale).
- Understand your assets and liabilities. By constantly tracking your assets and liabilities (including any changes to them), you’ll find out what you can anticipate in the future – and, importantly, what you have to do to get ready.
- Comply with Australian legislation. Under Australian corporate law, companies are expected to prepare a degree of financial reporting to various government agencies including the Australian Securities & Investments Commission (ASIC) and the Australian Tax Office (ATO). If you run a public company, you may also need to report to the Australian Securities Exchange (ASX). Financial reporting must also comply with the Australian Accounting Standards.
Main types of financial statements
There are various types of important financial reports you’ll need to know to get your financial reporting spot on.
A balance sheet is a report that captures the entire financial position of your business at any given point in time. This includes your company’s assets, liabilities at equity. It is quite literally a ‘snapshot’ into the financial health of your company.
Profit and loss report
Often called a ‘P&L’ report (or an income statement), this report shows your business’ expenses, revenue, net loss and income over a given period. It shows how much you lost, earned and is often looked at to understand the company’s “bottom line”.
Cash flow statement
This report quite literally shows the cash flowing in and out of your company. It will provide your investors and stakeholders an idea of how you’re operating and managing to pay off your debt. It also shows how you’re financing your expenses and your investments.
Statement of retained earnings
Also known as a statement of changes in equity, this financial report shows exactly that. It shows the changes in your earnings after dividends are issued to your stakeholders.
Why financial reporting is critical for a successful business
The whole point of financial reporting is twofold:
- Complying with Australia’s stringent financial reporting laws
- Internally analysing how healthy your business is
We’ll outline the importance of both of these factors in more detail below.
Complying with financial laws
There is little point running a company if you don’t comply with financial reporting requirements mandated by corporations legislation. Failure to comply can lead to substantial penalties imposed on your company, and jail time for company officers (such as directors and secretaries) in the worst cases.
Section 319(1) of the Corporations Act 2001, which is Australia’s primary company law, relevantly says:
A company … that has to prepare or obtain a report for a financial year … must lodge the report with ASIC …
Failure to comply with this section is an offence of strict liability.
CASE STUDY: Coal company charged with breaching financial reporting laws
In 2021 and again in 2022, the Griffin Coal Company was charged with failing to meet its financial reporting obligations.
The Australian Securities & Investments Commission (ASIC) allege that the company failed to lodge annual reports on time for the March 2018-19 and March 2020-21 financial years.
The company faces the prospect of being fined hundreds of thousands of dollars.
You can read the relevant ASIC press release here.
The above case study highlights that ASIC is currently actively pursuing companies who fail to comply with their financial reporting obligations. It’s now more important than ever that your financial reporting is done properly, efficiently and lodged with the relevant government authorities within the applicable legislative time frames.
“In theory at least, some of these offences have maximum imprisonment penalties of up to 15 years,” corporate lawyer Dan Butler told the ABC. “People can go to jail. It’s critical to the functioning of the system that these things are kept up-to-date, they’re reviewed independently and that everybody can trust the numbers”.
Analysing your company’s financial health (and keeping investors in the loop)
Legal obligations aside, it is critical for a company to internally assess its own performance. This is so that you can quickly and accurately find out where you’re performing well – and performing badly – so that you can make changes sooner rather than later.
Delivering financial reports on time keeps your investors, creditors and stakeholders in the loop about the health of your company. These entities will expect to constantly know how your company is performing because they – quite literally – have a ‘stake’ in your business.
If your investors haven’t heard from you within the statutory timeframes, then that’s a major red flag. In the case of Griffin Coal, which we highlighted above, it was alleged that the company was ‘bleeding’ losses of more than $1 billion.
Get your financial reporting ready and accurate
If you’re looking to ensure that your financial reporting is accurate and lodged with the relevant government authorities on time, consider handing over the responsibility to an expert.
Here at 2account, we have years of experience and know-how when it comes to financial reporting obligations.
We can help you get it right every time – from preparing all your financial statements and helping you identify where your business is growing (and where it needs improvement) to liaising with ASIC to ensure you comply with corporations legislation.
We’re not just in the business of finance and accounting. We’re all about making life easier for business owners, helping you focus on growing your business while we take care of the reporting work. Get in touch with 2account today to discover more how we can help you.