Financial reporting is a legal requirement in many countries. It allows you to meet tax and accounting standards and provides a clear picture of your company’s financial health to creditors, investors and other stakeholders.
However, financial reporting’s impact goes far beyond compliance. It helps you control your expenses, identify opportunities for growth and plan for a profitable future.
In this article, you’ll learn why financial reporting matters, who uses it and the different types of financial reports that support any successful business.
We’ll also share some financial reporting best practices to help you navigate your numbers more effectively.
What is financial reporting?
Financial reporting is the process of documenting your company’s financial activities over a specific period, such as quarterly or annually. Its goal is to provide stakeholders with accurate and up-to-date insights into your company’s financial health and performance.
For example, a profit and loss statement (P&L statement) breaks down your company’s revenue, expenses and income over a given period. Here’s an example of a P&L statement from Wise:
Companies produce various types of reports to organize and share financial data, which typically includes:
Revenue. Your company’s total earnings from selling its products or services.
Expenses. Your business’s running costs (e.g., rent, salaries or production costs).
Cash flow. The movement of cash in and out of your business.
Net income. The actual profit (or loss) after you’ve deducted all expenses from your revenue.
Assets. Everything your business owns, including cash, property or company vehicles.
Liabilities. What your business owes, including unpaid salaries, pending bills or loans.
Capital (or equity). Owners’ stake in the business, including their initial investment plus any retained profits.
Some reports, such as trend analysis or sales forecasting reports, may include historical data or financial projections. Managers and analysts often use these reports to spot patterns or emerging challenges, such as seasonal dips in sales or changing consumer behavior.
Knowing this information helps them optimize future strategies, such as adjusting inventory levels or fine-tuning marketing campaigns.
Some financial reports are published for public review, especially if the law requires the business to do so. Others might be shared internally, such as with managers, company directors or shareholders.
CEOs and CFOs, for example, often use financial dashboards (like the one below) to monitor their company’s performance.
Tools like Pipedrive let you build reports like these to communicate financial metrics (in real time) across multiple departments and stakeholders.
We’ll discuss the different types of financial reports later in the article.
Get organized with your free sales pipeline excel template
Financial reporting vs. financial accounting
Financial reporting and financial accounting are two distinct (but related) processes.
Financial reporting is how you organize and present your company’s financial information so stakeholders like managers, investors, lenders or tax authorities can analyze it and make informed decisions.
For example, your income statement might show that while your sales grew 15% last quarter, rising supply costs cut your profits. This information can guide you in making cost-saving decisions to boost profitability, like switching to more affordable suppliers.
Financial accounting is how you collect this data. It involves recording every transaction on a daily basis, from sales and purchases to payroll and investments.
For instance, when accounting tracks each sale and supply cost throughout the quarter, those individual transactions reveal the 15% sales growth and rising cost trend in your financial reports.
While accounting records what happened, reporting explains what it means. Meticulous financial accounting creates a solid foundation for accurate and compliant financial reporting.
Who regulates financial reporting?
In the US, the Financial Accounting Standards Board (FASB) primarily regulates financial reporting. It provides clear guidelines under Generally Accepted Accounting Principles (GAAP).
GAAP ensures that all financial statements (especially those published by public companies) are consistent and easy to understand, which is critical for the stock market and overall economy.
Private companies, however, are not legally required to follow GAAP. Many private businesses still choose to adhere to these standards as a best practice. Doing so makes it easier for banks, investors and potential buyers to evaluate their financials.
Outside the US, many countries follow the International Financial Reporting Standards (IFRS), which the International Accounting Standards Board (IASB) regulates.
Although US-based companies aren’t required to follow IFRS, understanding these international standards can help them expand to global markets or attract international investors.
Why financial reporting matters for your business
Financial reporting is more than just paperwork. It shows you exactly how your business is performing, helps you make profitable decisions and opens doors to new opportunities.
For example, you can spot cash flow problems before they happen and find ways to cut costs without compromising quality.
Banks are also more likely to approve your loans when they see solid financial management and investors feel more confident backing your business.
Here are some more benefits of financial reporting for your company.
Protects your business
Accurate reporting helps you comply with accounting standards, tax regulations and local or international laws, saving your business a lot of money in the long run.
In 2023, the US Securities and Exchange Commission (SEC) levied over $1.5 billion in fines for civil penalties, which include financial reporting violations.
Regular financial reporting also creates an audit trail that can protect your business in disputes, such as supplier disagreements or employee claims.
For example, a supplier might claim you haven’t paid them for a $5,000 delivery in March. You can quickly pull up your payment records and bank statements to prove you paid them on March 15th, preventing any escalation.
Improves decision-making
Financial reporting translates data into standardized statements, which helps stakeholders make informed decisions. Research shows businesses that make data-driven decisions are 5% more productive and 6% more profitable than their peers.
For example, your sales manager might use historical and current sales data to forecast revenue and predict trends. Accurate projections help them maximize resources and set realistic targets for the sales team.
Meticulously documenting your expenses can also help you uncover hidden costs. For instance, you might find a lot of your budget gets spent on redundant software subscriptions. You can proactively save costs by identifying and canceling those subscriptions.
Strengthens stakeholder relationships
Sharing accurate and regular financial reports with stakeholders builds confidence in your business. It shows you’re honest, transparent and reliable, attracting potential partners, investors and customers.
For example, imagine your retail partner wants to expand their order volume with your manufacturing company. They review your financial statements to assess your ability to scale and manage large orders.
Your reports show you’ve recently invested $2M in two new production lines and have strong working capital. Based on this solid financial foundation, they signed a three-year supply agreement, increasing their monthly orders from $200,000 to $450,000.
Transparency in reporting also increases the likelihood of securing lower interest rates with banks and getting better prices from suppliers who want to work with you.
Maximizes tax deductions
For small businesses, every dollar counts. A strategic financial reporting process helps you pay fair taxes without risking overpayment, saving you costs in the long run.
Recording every transaction enables you to easily identify all allowable deductions you might otherwise overlook. For example, you might be able to deduct expenses related to business travel, employee benefits and office supplies from your taxable income.
4 types of financial reports businesses use (with examples)
Every business needs to know where it stands financially.
Whether you run a small bakery or a tech startup, you must track your money and share that information with stakeholders. Over decades of accounting practice worldwide, four key financial reports have become the standard way to do this:
Income statement
Balance sheet
Cash flow statement
Statement of shareholders’ equity
These documents follow set formats to communicate important information to stakeholders, like how much profit your company made, the assets it owns and where it spends its money. Together, they provide a complete picture of your business’s financial condition.
These four statements form the foundation of financial reporting, but there are additional reports businesses may use for specific needs.
Let’s explore these statements (and other financial reports) in more detail below.
1. Income statement
An income statement (or profit and loss statement) shows your company’s profitability over a specific period (e.g., monthly, quarterly or yearly).
It breaks down details like:
Revenue streams
Operating expenses (e.g., rent, payroll or depreciation)
Non-operating expenses (e.g., interest payments)
Cost of goods sold (COGS)
Total and net income
Here’s an example of The Coca-Cola Company’s income statement:
Business owners, managers, investors and other stakeholders use income statements to understand how much the business makes, where this money comes from and whether there are any opportunities to cut costs and maximize profitability.
For example, your income statement might show utility costs are 25% higher than last year despite similar production levels. After analyzing usage patterns, you might invest in energy-efficient equipment to cut power costs.
2. Balance sheet
The balance sheet provides a snapshot of your company’s financial position at any given time. It contains the following information:
Assets. What your business currently owns, such as cash or bank balances, land, vehicles and machinery.
Liabilities. What your business owes in the near future, such as loans, accounts payable and mortgages.
Shareholders’ equity. What your business is worth to the owners after subtracting your liabilities from your total assets.
Here’s an example of The Coca-Cola Company’s balance sheet:
Balance sheets help stakeholders understand your company’s financial position. It shows them how likely your business is to meet its short-term and long-term obligations, such as paying back debts.
Investors may also use balance sheets to analyze returns and plan further investments.
For example, your shareholders might look at asset growth in your balance sheet over four quarters and find you have an excellent track record of investing in productive equipment. Your performance history might convince them to approve funding for an automated quality control system you want to implement in your warehouse.
3. Cash flow statement
Cash flow statements show how cash moves in and out of your business. These financial reports help your company anticipate cash needs and prevent unexpected shortages.
Running out of cash is often cited as the top reason startups fail, making the statement of cash flows even more significant for small businesses.
Your cash flow statement is divided into three activities:
Operating activities include day-to-day business activities such as product sales, salaries or interest payments
Investing activities include the sale or purchase of any company assets, such as property or vehicles
Financial activities include any loans, cash from investors or money paid back to the owners
Here’s an example of The Coca-Cola Company’s cash flow statement:
Stakeholders use cash flow statements to understand your company’s liquidity and how you manage your finances.
For example, creditors might want to know if you have enough cash to repay your debts.
Analyzing your cash flow statements (that show stable cash reserves over the past three years) might convince them to offer you better payment terms.
4. Statement of changes in equity
The statement of changes in equity is a financial report that businesses use to show changes in their ownership equity over time. It helps track how your company’s net worth fluctuates due to profits, losses and distributions to owners.
In public companies, this statement also includes any stock transactions, such as issuing new shares or repurchasing treasury stock.
Take a look at Coca-Cola’s statement of changes in equity, for example:
Investors and shareholders use these statements to evaluate your company’s growth and returns, seeing how much you reinvest vs. distribute.
For instance, your equity statement might show you retained 70% of last year’s profit to expand your business while maintaining steady dividend payments. Your ability to prioritize growth without compromising shareholder returns might attract new investors.
Other types of financial reports
In addition to the four main types of financial statements, businesses may use other financial reports for specific purposes, such as:
Notes to financial statements. These explain and clarify items in your financial reports, like unusual transactions or accounting methods. They help stakeholders understand the context behind the numbers and verify their accuracy.
Financial dashboards. These visual, interactive displays present metrics like revenue, expenses and cash flow in real time. Leaders monitor dashboards to track performance and make quick decisions without digging through detailed reports.
Quarterly and annual reports. These combine financial data with management insights to help stockholders evaluate company performance, trends, profitability and strategic progress.
Sales reports. These track sales activities and performance across different products, regions and teams. Managers and executives use these insights to set goals, evaluate progress and optimize sales strategies.
Variance reports. These reports compare planned and actual expenditures. They help managers track differences in spending from budget to spot potential problems and make quick adjustments to stay on target. (These are also called budget vs. actual reports.)
Tax returns. These share your company’s income, deductions and tax obligations with the authorities. Accurate tax filing helps your business stay compliant, avoid costly penalties and pay fair taxes.
Accounts receivables (AR) aging reports. These organize unpaid customer invoices by time to show how long they’ve been past due. Finance teams use these reports to manage cash flow and prioritize follow-up emails on overdue payments.
Work in progress (WIP) reports. These monitor ongoing project costs and status in industries like construction. Project managers use these reports to track expenses, revenue and profitability of unfinished work to adjust budgets and bill clients accurately.
Who uses financial reports?
Businesses don’t operate in a vacuum. Your financial position directly (or indirectly) impacts other individuals and organizations with a vested interest in your company.
These stakeholders rely on various financial reports to analyze your company’s performance, assess risks and make decisions about its future.
External stakeholders, for example, use financial reports to manage their exposure to and engagement with your business.
Here are some external stakeholders who may use your financial reports:
Regulatory authorities monitor these reports to ensure compliance with financial laws, reporting standards and tax regulations.
Investors and shareholders evaluate profitability, stability and growth metrics to track returns and make investment decisions.
Creditors analyze financial reports to assess the risk of lending money to your business. They pay special attention to your debt service coverage ratios and assets.
Suppliers assess your company’s stability and reliability before extending credit terms or establishing long-term partnerships.
Auditors examine reports to verify accuracy and compliance, and identify potential fraud risks.
Financial analysts study performance metrics and conduct peer comparisons to share recommendations for investment or banking activities.
Competitors extract insights about your market strategies, operational efficiency and industry trends to refine their own methods.
Other companies scrutinize financial reports to determine your company’s value and risks when considering potential mergers, acquisitions or partnerships.
Customers, particularly in B2B relationships, review financial reports to analyze your reliability in delivering products or services.
Financial reports are also used internally in your company, although they’re used differently.
Here are some internal stakeholders who might use your financial reports:
Board of directors might use financial reports to understand performance, set standards and make high-level strategic decisions
Executives and managers may closely monitor financial metrics to make operational decisions, identify opportunities and allocate resources
Employees may track your company’s financial performance to build confidence, boost morale and direct their efforts toward shared business goals
Internal stakeholders use these reports to investigate operational details more thoroughly, helping them actively manage performance and guide daily business decisions or strategic planning (e.g., resource allocation).
Financial reporting best practices for small businesses
Regarding financial reporting laws, small businesses enjoy more flexibility than public companies.
However, the right approach to reporting can still save your company thousands of dollars, regardless of its size.
Here’s how your small business can maximize the benefits of financial reporting.
Use financial reporting software
Financial reporting software streamlines tasks like data entry and calculations, virtually eliminating manual error and saving you hours of work. These tools make it easy to track your money and generate shareable reports with automation and AI.
Pipedrive, for instance, lets you create sales reports and customizable dashboards that display metrics like total deals, conversion rate, average deal size, revenue forecast and more.
You can track these metrics in real time and share them with executives, managers and team members to keep everyone informed and aligned with business goals.
Pipedrive integrates seamlessly with accounting software like QuickBooks and Zoho Books. Connect these tools to automatically sync lead and sales data, send invoices and populate your financial reports.
Hire a professional accountant
Working with a skilled accountant can help you make smarter financial decisions, optimize your tax strategy and spot red flags before they become crises.
It also keeps you compliant with accounting and reporting standards to avoid paying hefty fines.
If you don’t have the budget to hire a full-time, in-house accountant, consider outsourcing bookkeeping and reporting tasks to remote or freelance accountants. Find someone who knows your industry and can provide credible references.
Regardless of how you do it, hiring a professional is often cheaper than fixing mistakes later. A good accountant will save you money through better financial planning and help you set up systems that grow with your business.
Prepare for audits and reviews
IRS audits can be stressful, especially if you don’t have everything in order. Stay organized to maintain credibility and avoid any last-minute struggles or penalties.
Here are some tips to prepare for audits and reviews year-round:
Keep clear records of every major transaction (e.g., invoices, receipts and emails)
Implement a filing system (digital or physical) to find documents quickly
Reconcile your accounts monthly and fix issues right away
Document your accounting methods and reporting process
Maintain a detailed list of equipment and inventory, including purchase dates and costs
Have your accountant review your systems periodically to catch problems
If you handle sensitive customer data, keep proof of your security measures
Set a regular reporting schedule
Regular reporting (e.g., monthly or quarterly) keeps you on top of your company’s performance and means you’re ready when banks, investors or tax authorities need information.
Regular financial reporting is especially valuable for small businesses during the first few years when cash flow can be tight.
Monthly reviews, for instance, can help you spot issues like slow-paying customers or seasonal sales dips before they become serious cash shortages.
Organizing financial records also makes it easier to secure additional funding when you need to expand or handle unexpected expenses.
Lenders and investors want clear evidence of your company’s financial health. When you can quickly show well-maintained reports of steady revenue, healthy cash flow and responsible debt management, they’re more likely to trust you with their money than if you present hastily assembled or incomplete records.
Final thoughts
Financial reporting is a vital business practice that helps you stay compliant, understand your company’s performance and growth trajectory and make better decisions.
Accurate financial reporting can also attract potential investors, partners and customers. It can even help you secure lucrative deals with banks and suppliers.
Use financial reporting software like Pipedrive to track sales data, generate visual reports and share insights with key stakeholders. Sign up for a free 14-day trial and take it for a test drive.
