Disorganisation. Loss of potential growth opportunities. Unforeseen expenses and tax bills.
Start-ups and SMEs shouldn’t underestimate the importance of established financial reporting and analysis procedures.
At the grassroots level, it’s completely understandable that you want to restructure expenditure. In this article, you’re going to find out why finance is an area in which you cannot afford to cut corners. We’ve helped clients dig themselves out of a financial black hole, putting them back on track to reach revenue growth goals. We can do the same for you.
The untapped power of financial reporting and analysis
Financial reporting and analysis are the lifeblood that flows through your business; accurate, up to date statements let you know exactly how the allocation of funds are performing. Based on this data, you can determine strengths, weaknesses and act accordingly. In addition, it provides owners with a level of insight that helps businesses remain compliant while streamlining income or expenditure-centric strategies holistically.
To assist you to unlock the untapped potential of financial vigilance, we’ve compiled a guide that breaks down the fundamental facets of this essential business practice.
What is financial reporting and analysis?
Financial reporting and analysis refer to the typical practices that give owners (as well as investors and stakeholders should your company already have them) an accurate overview of the business’s key performance indicators (KPIs), which show the business’s current financial status.
A financial KPI or metric is a measurable value that indicates a business’s financial performance, e.g. expenses, sales, profit, and cash flow. The purpose is to optimise and achieve the business’s financial goals such as revenue growth, brand expansion, investment opportunities and listing on the Johannesburg Stock Exchange (JSE).
Other metrics include:
- Gross profit margin
- Operating profit margin
- Net profit margin
- Budget variance
- Return on equity
Certified accountants and tax specialists use state of the art software and other business intelligence (BI) tools to extract, interpret and analyse these figures, providing critical insights.
The advantages of financial reporting and analysis
Here are five critical aspects that must be measured to gauge performance.
- Management of liabilities
The majority of businesses are likely to need, at some point, to borrow funds from institutions or private companies such as business loans, credit lines and credit cards. It’s vital to manage these liabilities carefully to ensure you’re not abusing the cash injection. Credit cards, for example, carry a high-interest rate, and it’s easy to rack up debt quickly that you might have trouble paying back due to compounding interest.
- Trend identification
Accurate financial reports will unveil specific past and present trends (positive and/or negative) on which you can either leverage or rectify to safeguard the wellbeing of your business. For example, if you own an eCommerce business, you may find that during certain months there is a decrease in traffic, lead generation and conversions (sales). The data will help you isolate and drill down the possible reasons why this happens at these specific times in the year.
- Real-time monitoring
Access to real-time, centralised insights allows you to make accurate, informed decisions swiftly, thus avoiding any potential obstacles while still maintaining your financial fluidity.
- Cash flow
Whether you’re a start-up or established business, cash flow is critical to its continuing health. If you’re having cash flow problems, the measured metrics will help you find out exactly where the issue(s) lie.
Financial reporting software has the functionality to access this deep-level analytical reporting data to ensure that your business remains compliant always. For example, you must adhere to compliance with South African Revenue Services (SARS) legislation. Mistakes such as late or incorrect submission of taxes can result in capital-draining penalties, further influenced by increases in interest.
Why financial reporting and analysis is a vital practice
- Attracting investors
The bottom line is that investors want to know they are going to earn returns on their investment. If you are looking to expand and are prepared to trade a cash injection for equity, you need solid objective financial reports. You may have a game-changing product and/or service, but if you can’t corroborate its market value with solid financials, many potential investors are going to decline the proposition. Some may consider taking a punt, but that’s quite a rare occurrence.
- Banks and credit vendors
Accurate financial reports are vital if you are considering applying for a business loan. The institutions require them in order to obtain precise knowledge of your business and how long it will take to pay back the money.
For accurate financial projections & predictive strategies
Where is your company going to be in the next five years? This is where financial analysis plays a significant role. It can provide you with predictive data of specific metrics that will assist you in making accurate projections based on past or emerging trends.
In addition, predictive strategies can be developed to set realistic future goals to grow revenue and provide the best return on investment.
Financial reporting and analysis provides business owners, investors and shareholders with accurate data to assess the financial integrity of the business and make informed decisions regarding growth and expansion goals to increase revenue and ROI. Speak to a business consultancy that has access to financial professionals who can assist you along the way.