What is an accrued expense vs accounts payable?
In accounting, understanding the difference between accrued expenses and accounts payable is crucial for managing a company’s financial health. Both terms refer …
Financial reporting is the process of tracking, documenting and communicating financial activities over a specific time, usually performed on a quarterly or annual basis. For businesses, this process is essential for both executives and investors to maintain confidence in the operational viability of the organisation.
Proper and regular financial reporting is crucial not only for financial success, but it’s a driving factor for business decision-making. Generally, the main person responsible for financial reporting in an organisation will be the Chief Financial Officer (CFO), supported by a team should the organisation be big enough. The CFO would provide detailed analysis and financial reporting to other members of the executive team, board and other key stakeholders as required.
For-profit businesses usually consider the main financial reports to be the balance sheet, cash flow statement, statement of retained earnings and income statement.
Business owners are forced to make decisions every day, whether big or small, that may impact the direction of their organisation. Despite decision making being a key skill for executives and employees alike, a recent executive survey by McKinsey & Company states only 20% of respondents believe their organisations excel at decision-making.
One of the most critical steps in decision-making is assessing the financial risk associated with all the potential outcomes, also known as financial risk management. Key financial statements, such as the balance sheet or income statement, give real-time snapshot of historical performance, profitability, and long-term outlook.
Even for privately held companies, transparency is essential when dealing with investors, a board, key executive stakeholders. To maintain investor interest, it’s expected financial reporting will be detailed and organised. Beyond just being able to report and assess the current state of affairs, financial professionals will need to be able to show long-term outlook, projections, with the added assessment and consideration of external factors which may impact financial performance, such as industry and economic trends.
Financial reporting is crucial when building relationships with creditors. Whether a business is looking to raise capital through loans, private investments or public markets, it’s essential to have detailed and accurate financial reporting to strengthen creditworthiness.
A more essential element of financial reporting is to meet regulations when it comes to law and compliance. From a legal perspective, financial reporting covers a company’s tax obligations, by making sure documents are submitted to the appropriate government agencies for review (for example, in the U.S. this would be the Internal Recenue Service or IRS).
Further to our point on how financial reporting is important for decision making, it allows companies to set their targets for the year based on retrospective performance and data. By reviewing financial reports, companies can strategically allocate spend and budget across departments, make decisions about hiring additional team members, and set details key performance indicators (KPIs) to track success throughout the year.
GAAP is the set of detailed accounting guidelines and standards in the US that ensure all companies provide clear and consistent financial information (in Australia, the equivalent is the IFRS).
With GAAP, it’s much easier for investors, creditors, and other parties to evaluate how a business or organisation is performing. Under the guidelines, details such as liability declarations and tax preparations are filled in a standardised manner.
In the US, only regulated and publicly traded businesses are obliged to follow these principles. However, since they make the market much more convenient, many private companies will also opt to follow them.
These are the ten concepts behind the GAAP principles:
In the business world, it’s also common to come across the term IFRS (International Financial Reporting Standards). The idea is similar to GAAP in that these are a set of accounting rules that aim to make financial statements more consistent, transparent, and comparable at a global level.
Nowadays, IFRS has replaced many different national accounting standards (it’s used in the European Union and many other places throughout the world). However, some countries, such as the US and China, still choose to operate on different principles.
While there are many different IFRS standards to watch out for, these are the aspects that are most important:
Although IFRS and GAAP are quite similar, the largest difference between them is the IFRS is principle-based and GAAP is rule-based. For this reason, GAAP leaves less room for interpretation, while IFRS provides more flexibility.
The goal behind a financial audit is to objectively examine and evaluate an organisation’s financial reporting to ensure their records are accurate and fair. Audits can either be performed externally or internally by a company’s employees.
Audits follow their own set of standards to ensure accuracy, consistency, and verifiability. In the US, GAAS (Generally Accepted Auditing Standards) are the set of systematic guidelines auditors use to analyse companies’ financial records.
Like GAAP, GAAS also includes ten principles, but they are divided into three separate sections: General standards, standards of field of work, and standards of reporting.
The General Standards are simple:
Did you know that human error accounts for 41% of all accounting mistakes? Today, many accountants and finance professionals have looked at ways to automate tracking and reporting. This helps them save time and money, while also improving accuracy on reports.
Beyond the options to automate reporting, finance departments have become a popular topic in the media as data breaches and cyber security become one of the top cause for financial losses today. In fact, cybercrime costs are predicted to reach $9.5 trillion USD in 2024.
Beyond accurate financial reporting, companies are looking to protect themselves from falling victim to cyber-attacks and phishing attempts, by investing in automated protection technology.
From everything we’ve discussed, it’s clear that financial reporting not only provides several benefits but also makes the market a more transparent and honest place.
Whether the goal is to optimise workflows, cut debts, or even improve cash flow, this can be achieved when an organisations invest in strong financial reporting.
In accounting, understanding the difference between accrued expenses and accounts payable is crucial for managing a company’s financial health. Both terms refer …
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