Financial reporting is how a company communicates with its stakeholders and partners. Its importance should not be underestimated. Quarterly financial reporting shows the company’s financial health and can be used to set goals. Producing professionally prepared financial statements can help you build trust in your business relationships.
There are three required financial reports, four if you’re doing business internationally. According to the IRS, the required reports are due on the fifteenth of the month following the end of each quarter and by January 31st for an end-of-year report. Public companies registered with the SEC have 35 days after each quarter and 60 days for year-end reports.
Required Financial Statements
The Securities and Exchange Commission (SEC) requires quarterly financial reports from publicly traded companies with over $10 million in assets and 500 or more shareholders. Privately owned businesses are not required to file, but it’s a good idea to get into the habit of doing it anyway. Here are the four reports that are required:
1. Income statement
The income statement, aka profit and loss statement (P&L), is typically prepared first because it doesn’t require data from other statements. It includes total sales and revenue, cost of sales, administrative and operating expenses, non-operating income and expenses, gains and losses, net earnings, and earnings per share (EPS).
One appealing feature of an income statement is the itemization of revenue and expenses. For example, operating revenue from production and sales is separated from non-operating revenue like interest earned or rental income from a property. Expenses are broken down similarly, with one category dedicated entirely to the cost of goods sold (COGS).
2. Balance sheet
A balance sheet provides a public view of a company’s financial position and solvency, which are important to investors and shareholders. The balance sheet lists current assets, liabilities, long-term receivables, and debt. These items are broken down into separate categories, so you can use them to calculate business ratios and metrics.
Your balance sheet is important because it tells investors and shareholders whether the company can pay its debts, cover operating expenses, or award dividends on its stock. The balance sheet also displays shareholder equity, which can influence the market value of a company’s stock. The SEC watches that number closely, so accuracy is essential.
3. Cash flow statement
Your cash flow statement shows the company’s cash inflows and outflows over a period of time. There are two ways to prepare this statement. The direct method uses actual cash flows from operations. The indirect method, which is more common, takes data from the income statement and balance sheet to create the cash flow statement.
The cash flow statement is a liquidity indicator for your business. It can tell you if you can afford to pay your bills, fund a growth or expansion project, or generate additional cash in upcoming reporting periods. Like the income statement and balance sheet, the cash flow statement will be available to the general public for reference and review.
Additional Financial Reports
Other financial reports are not required by the Internal Revenue Service (IRS) or the Securities and Exchange Commission (SEC). The structure and location of your business will determine which of these is necessary. Ask your accountant if you should prepare any of the financial reports below to comply with state or federal laws:
4. Statement of Retained Earnings
The statement of retained earnings is not a publicly available financial statement. It’s primarily for investors and lenders who want to know how much net income is distributed to shareholders. Investors are interested in that for obvious reasons. Lenders want to know exactly how much of your incoming revenue is going back out the door in dividends.
You can prepare a statement of retained earnings by subtracting the net profit and dividends from the total equity of the previous reporting period. Net profit can be found on the income statement. Dividend payouts are listed in the cash flow statement. The total equity can be found on the balance sheet. They’re designed to work that way.
5. Note to Financial Statements
The “Note to Financial Statements” is required by the IFRS (International Financial Reporting Standards) if you’re based in the United States and doing business in another country. It provides a more detailed explanation of the assets listed on your balance sheet. This statement is not required if you only operate domestically, but it can’t hurt to prepare it anyway.
Check with your accountant and familiarize yourself with Generally Accepted Accounting Principles (GAAP) rules to understand why you might need this or other reports we’ve discussed here. You’ll also want to read the International Financial Reporting Standards (IFRS) if you do business overseas. Call us if you have questions about those.
Using Financial Reports to Evaluate Your Business
Why is financial reporting important? Review last month’s post titled “5 Financial Ratios Every Business Should Track.” It presents a strong case for using liquidity ratios to determine your company’s financial health. You need a balance sheet to get the numbers to calculate a quick ratio or current ratio. Your EPS is already listed there.
Avoid the assumption that your business is doing well because you’re getting a lot of visitors or a bump in revenue. Financial reporting provides a holistic view of your company that factors in expenses, debt, and dividends you pay to shareholders. The numbers on your income statement, balance sheet, and cash flow statement tell the real story.
Don’t attempt to prepare financial reports on your own if you lack formal accounting and finance training. They’re too important to risk making mistakes. Call 262-253-9955 or use the form on our Contact Page to book an appointment with us. Our team will walk you through your reporting requirements and explain how we can help you with them.
