WHAT IS FINANCIAL REPORTING?

INTRODUCTION

Financial reporting is a key accounting practice in organizations. If you’re in the banking sector this is even more important for you. But we also know that financial reporting can be a difficult task to carry out, especially for large organizations that have several arms and departments. The use of Artificial intelligence in planning and preparing financial statements can help organizations like this, to reduce stress and workload, while ensuring speed and accuracy in preparing business financial statements.

According to Statista, the finance industry recorded investments worth about 35 billion U.S. dollars in artificial Intelligence in 2023. The bulk of these investments comes from the Banking sector, with investment levels of over 60%.

In this article, we will look at what is financial reporting, why it is important, what is included in financial reports, simple profit and loss (P&L) statements, and most importantly how AI can help you in ensuring these results.

FINANCIAL REPORTING

Financial reporting is an accounting process that provides detailed financial statements that show the financial health and growth of a company. It is usually carried out quarterly or yearly depending on the company. Financial reporting is presented by the management of the company to stakeholders, investors, market analysts, and creditors to know the profit potential of the company. This report helps these principal bodies to make investment decisions based on the business profit and loss statement.

WHY IS FINANCIAL REPORTING IMPORTANT

Raising Capital

Financial reporting is important in helping businesses raise capital for their business. Companies of all sizes use financial reports to attract investors. When proposing to investors, one of the things they want to see is your income statement and cash flow projection. With this, they can determine if your business is profitable, sustainable, and shows growth potential before investing.

Financial statement analysis

This is the process of evaluating a business’s finances. Here, the company’s management looks at the company’s budget, cash flow statement, profit and loss statement, revenue, and income statements. This helps the management to know the financial status of the company (for the period in view) if the business is profitable or not and what needs to be improved on.

Financial reporting helps the company’s management understand and better manage their cash flow, working capital, budgets, operations management, etc. This leads to maximum productivity and higher income earnings.

Compliance and law

Financial reporting is also important in helping a company to know if they are adhering to the rules of conduct and standards of operation enforced by their governing body.

Your financial statements will help you see whether you are complying with the standard put down by GAAP (generally accepted accounting principles). GAAP is a body that enforces the laws of the FASB (Financial Accounting Standards Board) which states that all organizations and companies in the United States follow a set of accounting rules, standards, and procedures to carry out the company’s financial reporting.

Of course, a default when detected can lead to a lot of problems with governing bodies like the SEC and even the Government. Your company may run into a financial crisis, bad decision-making, loss of investors, and worse off bankruptcy. Therefore, understanding how to carry out proper financial reporting is important.

WHAT IS INCLUDED IN FINANCIAL REPORTING

Financial reporting can be carried out by the accounting or finance department of the business or by the CFO of the company.

Regardless of company size, there are some important topics that a financial report must feature, they include; Financial statements like Income statements, cash flow statements, balance sheets, and shareholder’s equity statements. This may be included in the financial statement or reported independently. Financial reports also include quarterly/annual reports, MD&A (Management decisions and analysis), and SEC filings.

The information included in your financial report should be updated and accurate.

KEY TYPES OF FINANCIAL STATEMENTS AND REPORTS

Balance sheets

A company’s balance sheet is the totality of everything the company owns. These include the company’s assets, liabilities, and equity or net worth.

This is the breakdown of a balance sheet;

Assets: This includes everything the company owns. Both liquid and non-liquid assets. Real estate, cash, inventory, shares, etc. Every asset owned by the company should be listed on the balance sheet. A liquid asset is an asset that can easily and readily be converted into cash.

Liabilities: This is everything the company owes from rent, debt, taxes, accounts payable, etc. Everything should be listed and summed up into one whole unit.

Equity: This refers to the net worth of the company or what is owned by the company’s owner(s) after liabilities.

Income Statements

The income statement is also referred to as the P&L (profit and loss) statement of the company. It shows the total performance of the business for the period in view and gives investors insight into the level of profitability and if the business is still on track for future projected earnings.

The income statement comprises total revenue, expenses, gross and net profits, and P&L, within the period. These are some of the components of an income statement:

Revenue: This is the total amount of income that was generated within a period.

Cost of goods and services (COGS): This is the total amount spent on the purchase, inventory, marketing, sales, and delivery of goods and services

Gross Profit: Gross profit is the amount earned after removing COGS.

Income before Tax: This is the total income generated before tax is paid.

Net income: Net income is the total income realized after tax is paid

Stock earnings: If your company is publicly-traded, then you also must report on appreciating or depreciating earnings per unit share.

Cash Flow Statements

Investors typically use cash flow statements to understand how a company utilizes revenue and to know if inflow is higher than outflow or vice versa. The company’s management can also use it to see the business profit and loss statement, the company’s activities that generate the most money or take the most money from the business, and how much these activities generate in turn. This will help the company know what adjustments need to be made.

Cashflow statements are further categorized into;

Financing activities: These include borrowing and paying off debts, paying dividends, etc. Financing activities refer to the cash flow between the company and the business owner(s) or creditors.

Investing activities: This is part of the business cashflow statement that records the company’s activities in the purchase or sale of long- or short-term assets, like properties, equipment purchases, or sales.

Operating activities: This is always the first part of the cash flow statement, and it records inflows and outflows of cash from the businesses’ daily activities like manufacturing, sales of goods and services, salaries, etc.

Shareholder’s Equity Statements

This is also called the statement of owners’ equity and it refers to the difference between a company’s assets and liabilities. This statement often includes;

Common stocks: This type of stock represents ownership of a company’s equity. Usually, common stock owners have a right to vote leaders on the board and they have a right to dividends. Common stock owners claim the lowest priority in company assets.

Preferred stocks: These types of stocks usually have a larger claim on the company’s assets.

There are also retained earnings, treasury stocks, etc.

HOW AI CHANGES THE PROCESS OF FINANCIAL STATEMENT ANALYSIS

The banking industry is expected to spend an estimated 85.99 billion dollars on generative artificial intelligence, by 2030, Statistica reports.

This shows the importance of AI in enhancing the growth of the banking sector and other financial institutions.

AI has drastically reduced the rigorous process of financial reporting by coming up with automated processes for data entry, detecting compliance issues, documenting inventory, identifying emerging market trends, and market changes, and making forecasts on companies’ growth and performance. This frees up the accountant’s time and gives you a more accurate and detailed financial report of the company. This, in turn, helps the management board and investors in decision-making.

List of the 5 best AI software for financial reporting in 2024

Xero — Xero has several products including accounting software. As of the time of writing, Xero is acquiring ‘Syft’, a cloud-based reporting software for accountants, and bookkeepers. Syft can be used for bank reconciliations, creating profit and loss statements for small businesses, and automating day-to-day activities. It is very affordable, and you can start using it for as low as $13 per month. They have a free version, you can also download the Xero app and enjoy its benefits.

Domo — Domo is an AI software that provides financial reporting solutions. It analyzes data from across different departments in the company; HR, marketing, sales, etc., and puts them into a unified whole. The software also makes it possible to be used by a team. They have a demo version and you can check them out here.

Stampli — Stampli Is a software with a lot of features. Its primary feature is AP (account payable). Account payable is the amount of money that the company owes creditors or its suppliers for goods or services. Account payable is presented under the balance sheet and will aid the accounting process when creating a financial statement. Stampli has other great features like invoicing, card transactions, local and international payments, vendor management, etc. It’s a great tool for e-commerce businesses and retail businesses.

Trullion — This is a smart accounting AI tool that is great for Finance teams, and auditors. Auditors can use it for carrying out audited financial statements. It is used by teams to share data and progress reports. Workflow is seamless, fast, and reliable. You can get started with their demo version.

Planful — Planful is a tool for financial performance management. Companies of all sizes can use it to carry out advanced financial analytics and make financial predictions. It is timely, cost-effective, and accurate and helps finance and accounting teams collaborate for improved business performance.

CONCLUSION

Financial reporting is a must activity for companies of different sizes. There is the hard, manual way of going about it or the easier route which is the application of AI financial tools. These 5 tools will give you a great head start in ensuring compliance checks, business performance checks, and timely and accurate information.

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