A financial report is a detailed snapshot of a company’s financial life over a set period, usually a quarter or a year. It pulls together important data from the balance sheet, income statement, and cash flow statement to show how money is moving in and out of the business. It reflects profits and losses and shows how efficiently a company is operating – and its possible trajectory. The financial report provides investors, managers, and regulators with a deeper understanding of the company’s financial health and helps guide business decisions and strategic planning. These reports are also typically mandatory for corporations: for example, private and public corporations in most US states must file annual reports with the local secretary of state.

Below, we’ll explain what’s included in a financial report, why financial reports are so important for businesses, and how to create one.

What’s in this article?

• What’s included in a financial report?
  
• Why are financial reports so important for businesses?
  
• How to create a financial report
  

What’s included in a financial report?

Here’s what you can expect to find in a comprehensive financial report:

• Balance sheet: Also known as the statement of financial position, the balance sheet lists the company’s assets, liabilities, and equity at a specific point in time. It shows what the company owns and owes, as well as the interest held by shareholders.

• Income statement: Sometimes called the profit and loss statement, the income statement shows the company’s revenues, expenses, and profits or losses over a specific period. This statement provides insight into the company’s operations and its profitability.

• Cash flow statement: The cash flow statement details the inflows and outflows of cash within the company. It segments these into operations, investing, and financing activities. This statement is important for understanding the liquidity and overall financial flexibility of the business.

• Statement of changes in equity: Also known as the equity statement, the statement of changes in equity tracks changes in equity throughout the reporting period. These changes include net income, dividend payments, and issuance or buyback of shares.

• Notes to the financial statements: The notes to the financial statements provide additional context and detail about the financial statements and insight into the company’s accounting policies, contingencies, risk management practices, and other important financial information.

• Management’s discussion and analysis (MD&A): While it’s not a financial statement per se, the MD&A provides management’s perspective on the financial results and other factors that impact the business. It might include discussions on market conditions, financial commitments, and expected future performance.

Why are financial reports so important for businesses?

Here’s why financial reports matter for a business:

• Transparency and accountability: Financial reports ensure that a company is transparent about its financial condition, which helps maintain trust among investors, creditors, and other stakeholders. These reports hold the company accountable for its financial practices and outcomes.

• Strategic decision-making: Management uses the data from these reports to make informed decisions, such as expanding operations, cutting costs, or investing in new projects. Financial reports provide necessary insight so managers can evaluate options and strategise accordingly.

• Performance evaluation: Financial statements allow businesses to evaluate their financial health and operational effectiveness over time. Comparing current reports with previous ones helps identify trends, track growth, and manage areas that might be underperforming.

• Legal compliance: Corporations must stay on top of financial reporting to comply with accounting standards and regulations. Businesses must file these reports with the relevant authorities and, in the case of public companies, publish them to meet statutory obligations.

• Attracting investment: Comprehensive financial reports can attract investors by demonstrating the company’s profitability and stability. They provide the necessary information that investors and creditors use to assess the risk and potential return of investing in or lending to the company.

• Credit opportunities: Banks and other lending institutions use financial statements to evaluate a company’s creditworthiness when deciding on loan applications. Reports that demonstrate good financial health can lead to more favourable loan terms and credit lines.

• Budgeting and forecasting: Financial reports help businesses budget and conduct financial forecasting. By understanding where money is coming from and where it’s going, companies can better plan for future expenditures and investments.

How to create a financial report

Here’s a step-by-step guide to creating a financial report.

Gather financial data

Collect all relevant financial information for the reporting period. This includes transactions such as sales invoices, purchase orders, expense receipts, bank statements, and payroll records, as well as the beginning and ending accounting balances of assets, liabilities, and equity accounts. Reconcile these balances with supporting documents to ensure their accuracy.

Choose a reporting framework

Determine the accounting standards you’ll follow and the type of report you’re creating (e.g., annual, quarterly). Generally Accepted Accounting Principles (GAAP) is the most common framework in the United States, while many other countries use International Financial Reporting Standards (IFRS). Consider your audience and regulatory requirements when choosing between these options.

Prepare core financial statements

Prepare the following components of the statement:

Balance sheet: List assets (e.g., cash, accounts receivable), liabilities (e.g., accounts payable, loans payable), and equity (e.g., common stock, retained earnings) at a specific point in time, such as the end of the quarter or the end of the year. Ensure the accounting equation (Assets = Liabilities + Equity) holds true and classify assets and liabilities as current (expected to be converted to cash or paid within one year) or non-current.

Income statement: Calculate revenues (e.g., sales, service revenue) and expenses (e.g., cost of goods sold, salaries, rent, utilities) over the reporting period. Use accrual accounting to match revenues and expenses in the same period, regardless of when cash is received or paid. Present the results in a clear format, showing gross profit, operating income, and net income.

Cash flow statement: Analyse cash flows from operating activities (e.g., cash received from customers, cash paid to suppliers and employees), investing activities (e.g., purchase or sale of property and equipment), and financing activities (e.g., debt issuance or repayment, stock issuance or repurchase). Reconcile the ending cash balance with the balance sheet and use the direct or indirect method to present operating cash flows.

Statement of changes in equity: Show how equity has changed due to net income, contributions from owners, withdrawals by owners, and other comprehensive income (e.g., unrealised gains or losses on investments). Present the beginning and ending balances of each equity account and explain the changes.

Notes to financial statements: Explain accounting policies (e.g., depreciation methods, inventory valuation), major events (e.g., acquisitions, lawsuits), contingencies (e.g., potential liabilities), and other relevant details that aren’t apparent in the core statements. Make sure these notes are concise and cross-referenced to the relevant financial statement line items.

Draft MD&A

Provide management’s perspective on the company’s financial performance, key trends (e.g., changes in revenue or expenses), risks (e.g., competition, economic conditions), and future outlook (e.g., new products, expansion plans). Discuss the company’s liquidity (ability to meet short-term obligations), capital resources (ability to fund long-term investments), and results of operations (profitability). Use plain language and avoid jargon to make the MD&A accessible to a broad audience.

Consider additional components

Depending on your needs and the reporting entity, you might also include the following:

Auditor’s report: An independent evaluation of the fairness of the financial statements

Sustainability report: Information about the company’s environmental, social, and governance (ESG) performance

Governance report: Details about the company’s board of directors, management team, and corporate governance practices

Letter to shareholders: A message from the CEO or chair summarising the company’s performance and future plans

Review and verify

Check all calculations, data, and information for accuracy. Confirm that the report complies with accounting standards and regulatory requirements. Have someone else vet the report to catch any errors or inconsistencies.

Format and present

Organise the report in a clear, concise format, using tables, charts, and graphs where appropriate. Structure the report with a table of contents, page numbers, and headings and choose a professional-looking font and layout.