What is financial reporting?

Financial reporting is the systematic process of recording, analyzing, and presenting a company's financial information to various stakeholders. It provides a comprehensive overview of an organization's fiscal health and performance over specific timeframes, typically quarterly or annually.

‍

You can think of it as a financial health check-up for businesses. Just like you might look at your bank statement to see how you're doing with money, companies use financial reports to show  investors, creditors, regulators, and other interested parties how they're performing. This process helps these stakeholders make informed decisions and ensures transparency in the company's financial operations.

Why is financial reporting important?

Imagine you're the CEO of a rapidly growing tech startup. You need to decide whether to open a new office, how much inventory to order, and if you can afford to hire more engineers next quarter. But without accurate, up-to-date financial reports, you're basically flying blind. That's why financial reporting is so critical for companies of all sizes, across all industries. 

‍

Here are some of the key reasons businesses need robust financial reporting:

Monitor financial performance 

Regular financial reports allow companies to closely track revenues, expenses, cash flow, and profitability over time. By reviewing this data frequently, leaders can quickly spot red flags, such as spiking costs or declining sales, and take corrective action. Detailed reports also help managers monitor specific products, projects, or business units to see what's driving or dragging down overall performance.

Make informed business decisions

Financial reports provide the hard data leaders need to make smart, timely decisions. Should the company expand into a new market or invest in new equipment? Can it afford to launch a new product line? Are marketing expenses generating strong ROI? Granular financial data helps companies allocate resources efficiently and capitalize on opportunities.

Plan and forecast 

Companies lean heavily on past financial performance to predict and plan ahead. By digging into historical reports, finance teams can create realistic budgets and forecasts, game out different possibilities, and set achievable goals. The more detailed the financial data, the more accurate the planning can be.

Secure funding and credit

Whether a company wants a bank loan, venture capital funding, or to sell stock to the public, it has to show solid financial reports to get people to invest. Investors and lenders want to see healthy, growing sales and cash flow before they put their money on the line. Strong financial reporting helps businesses prove they're stable and have potential.

Ensure accountability and regulatory compliance  

Financial reports promote transparency and trust with stakeholders by showing how the company handles its money. Thorough reporting also helps companies comply with tax laws, accounting regulations, and other financial requirements to avoid penalties or legal issues. Public companies must file regular GAAP-compliant reports with the Securities and Exchange Commission (SEC), for example.

Measure overall business value

Ultimately, financial reporting reveals the true worth of a business. The balance sheet captures the company's total assets, debts, and equity–essentially, its book value. Ratios like profit margin, debt-to-equity, and return on assets show how financially strong and efficient the company is. Comprehensive reporting lets companies, investors, and analysts put a value on the business and see how it stacks up against competitors.

Types of financial reports

While there are many financial reports companies can produce, the four primary ones are the balance sheet, income statement, cash flow statement, and statement of shareholder equity. Here's a deeper dive into each of those:

Balance sheet

The balance sheet is like a financial snapshot, showing what a company owns and owes at a single point in time. Key components include:

• Assets: Everything the company owns and controls that has monetary value, such as cash, inventory, equipment, investments, and accounts receivable. Assets are typically broken down into current (convertible to cash within a year) and long-term.‍
• Liabilities: The company's debts and financial obligations, such as loans, accounts payable, wages owed, and taxes due. Like assets, these are split into current (due within a year) and long-term liabilities.
• ‍Shareholder equity: What's left for the owners after you subtract liabilities from assets. It includes money from selling stock and profits kept in the company.

‍

The balance sheet follows the formula: Assets = Liabilities + Shareholder Equity. This report helps gauge a company's liquidity, leverage, and overall financial health at a high level.

Income statement 

Also called the profit and loss statement, the income statement summarizes a company's financial performance over a period of time, usually a quarter or fiscal year. It follows a simple equation:

‍

Revenues - Expenses = Net Income (or Net Loss)

‍

The income statement first lists the company's revenues or total sales during the period. It then subtracts the cost of goods sold and operating expenses like salaries, rent, and marketing to calculate operating profit. Finally, it factors in non-operating income and expenses, taxes, and interest to arrive at net income–the famous "bottom line."

‍

Income statements can be shown in a simple single-step format or a more detailed multi-step layout. The multi-step format is more common because it gives stakeholders a better view of the different types of revenue and expenses. The income statement helps investors and lenders evaluate profitability, predict future earnings, and decide if the business model makes sense.

‍

Cash flow statement

While income statements show whether a company made money, they don't always reflect its cash position. Many transactions are recorded on an accrual basis before money actually changes hands. That's where the cash flow statement comes in, detailing the company's inflows and outflows of cash during the period.

‍

The cash flow statement is divided into three sections:

• Cash flows from operating activities: Cash received from selling goods/services and paying expenses ‍
• Cash flows from investing activities: Cash used to buy assets like property and equipment or received from selling investments‍
• Cash flows from financing activities: Cash from issuing stock or bonds and taking on loans, as well as outflows from dividends paid and debt repayment

‍

The net cash from each section is added up to show the total change in the company's cash balance for the period. For companies that use accrual accounting (recording transactions when they happen, not when cash is exchanged), the cash flow statement is key to monitoring cash on hand, spotting potential shortages, and checking the quality of reported profits.

Statement of shareholder equity

Also known as the statement of retained earnings, this report shows the changes in owners' equity over the reporting period. It displays the beginning equity balance, additions from net income or share issuances, and reductions from losses or dividend payments to arrive at the ending equity balance.

‍

The statement of shareholder equity allows investors to understand how their ownership stake has changed and why. It's an important link between the balance sheet and income statement.

Other common financial reports 

In addition to the big four financial statements, companies may prepare other financial reports tailored to their needs:

• Accounts receivable aging report: This report lists outstanding customer invoices by how long they've been overdue. Helps assess collection efforts and estimate uncollectible accounts.
• ‍Budget vs. actual report: Compares actual financial results to budgeted targets to see if the company is on track. Helps identify problems and make resource adjustments.
• ‍Inventory reports: Provide details on the quantity, value, and turnover of inventory on hand. Important for managing stock levels, production schedules, and detecting shrinkage.
• ‍Payroll expense reports: Break down labor costs by employee or department over a certain period. Helps monitor and control the company's biggest expense category.
• ‍Sales reports: Analyze revenue by product line, region, salesperson, or customer. Allow leaders to spot trends and top performers.

‍

Of course, there are countless other types of financial reports companies can generate. The goal is to provide stakeholders with relevant, reliable data they can use to make wise decisions.

‍

Discover Ramp's corporate card for modern finance

Learn more

Financial reporting requirements 

U.S. public companies must file audited annual reports (10-K) and quarterly reports (10-Q) with the SEC. These reports follow GAAP (Generally Accepted Accounting Principles) standards and include the four key financial statements plus footnotes. 

‍

Private companies have more leeway in their reporting but still must follow certain rules:

• All companies must maintain accurate financial records for tax purposes. The IRS requires specific documents like W-2 forms and 1099s to be filed annually.
• Companies seeking funding will need to produce credible financial statements, often audited or reviewed by CPAs, to satisfy investor or lender requirements.
• Government contractors must follow special accounting rules and submit certified cost and pricing data on certain projects.
• Financial industry firms face strict reporting rules around capital reserves, risk management, and customer data under laws like Sarbanes-Oxley and Dodd-Frank.

‍

But even without legal requirements, all companies should make timely, accurate financial reporting a priority. It's how they keep track of their performance, make smart decisions, and build trust with stakeholders. And these days, cloud-based accounting software and automation tools are making it easier than ever to generate reliable financial reports.

How Ramp can streamline financial reporting 

Managing business expenses is tedious and time-consuming, but it doesn't have to be. Ramp offers a next-gen corporate card and expense management platform that automates expense tracking, reconciliation, and reporting. 

‍

With Ramp, all your expense data flows seamlessly into one integrated platform, so you can see spending trends in real-time, by category, department, or employee. No more chasing down receipts or manually mapping GL codes. Ramp uses AI to automatically collect receipts, categorize expenses, and detect duplicate subscriptions or out-of-policy purchases. 

‍

Need to analyze T&E costs or compare software spend vs budget? Ramp lets you drill down into granular expense data and export custom reports in seconds. The platform even has built-in controls to enforce spending policies and streamline approvals. 

‍

By consolidating all non-payroll expenses in one place, Ramp eliminates hours of manual work for finance teams and helps you close your books faster, with confidence. A stronger expense reporting process means stronger financial statements overall.

‍

Don't let outdated expense management derail your financial reporting. Streamline your process with Ramp so you can focus on growth, not paperwork.