Did you know that according to CNBC, 82% of businesses fail due to cash flow problems? That's why knowing how to create financial reports is very important.
Creating accurate and informative financial reports is an important skill that can help you monitor your company's financial health.
Whether you are a small business owner or a financial manager in a large company, creating accurate and informative financial reports is an important skill to have.
This article will provide a step-by-step guide on how to create financial reports correctly. Check it out!
How to Create Financial Reports
Here are five steps to creating a company's financial report:
1. Writing a Company Description
The first step in writing a financial report is to create a brief summary of your business. In this section, you can explain the business itself and the industry in which it operates.
You can also review important events that occurred during the year in this section.
In addition, don't forget to include achievements or important moments that the company has achieved. In fact, it may also be when the company gives awards to employees or supervisors.
2. Include a Letter from the CEO
The next way to prepare a financial report is to include a letter from the CEO. This letter should sound professional but still friendly.
This letter from the CEO gives the company's leaders the opportunity to comment on their activities throughout the year. Then, to thank everyone who has contributed to the company's success.
In this letter, the CEO usually also acknowledges unexpected problems faced by the company and how to overcome them.
Here are some things that a CEO or business leader should include in their letter:
- Acknowledge the unexpected problems and how the company overcame them. Explain what the business can do in the future to ensure that the problem no longer affects the organization.
- Express gratitude to employees, managers, shareholders, or anyone who directly contributed to the company's success during the previous year.
- Explain expectations for future business performance and plans that can be implemented to achieve goals.
3. Include Analysis and Data
In this section, we will discuss the analysis and data in the financial report. This is a very important section because it includes the main financial analysis that outlines the previous year's activities.
By conducting a thorough analysis of your company’s financial data, you can prove to your shareholders that their investment was a wise and profitable decision.
Financial data also provides information that allows you to calculate cash flow and margins, adjust pricing, and accurately prepare taxes.
There are three main types of financial statements that must be included, namely:
Statement of Cash Flows
A cash flow statement is a document that records the amount of cash that comes in and goes out of an organization.
It is a basic record of the financial activity in a business. To calculate the ending cash balance, you can do the following calculations:
- Beginning Cash Balance: Start with the beginning cash balance that the organization has at the beginning of the time period you are analyzing.
- Add Cash Inflows: These are transactions that bring cash into the business, such as the sale of products or payments to customers for receivables.
- Subtract Cash Outflows: These are transactions that use up cash in the company, such as purchases of merchandise, advertising and promotion costs, and payments to employees.
- Ending Cash Balance: After performing the above calculations, the end result is the ending cash balance. This is the amount of cash remaining at the end of the time period you are analyzing.
Having a good cash flow statement allows you to understand how efficiently your business is managing its cash and monitor its overall financial health.
Income Statement
The next report that needs to be included is the income statement. This report shows the company's net profit for one year.
Here are the steps to create a company's income statement:
- Gross Profit: Start by determining total sales.
- Subtract Cost of Goods: Subtract the cost of goods such as supplies or inventory materials.
- Subtract Total Operating Expenses: These are the costs incurred by the company in running its day-to-day operations. For example, taxes, utilities, or other costs necessary to run the business.
- Subtract Income Tax: Subtract income tax from net income before taxes to get net operating income.
- Add Retained Earnings: Add the company's retained earnings from the beginning of the year to get retained earnings at the end of this financial year.
After these steps are done, you will get the company's net income. This is the amount of money left over after all expenses and taxes are paid, including profits that have been retained from previous years.
By understanding the income statement, you can see how well the company is doing financially over the past year.
Balance Sheet
For a balance sheet to function properly, owner's equity should equal the sum of assets and liabilities. The balance sheet consists of three main sections: liabilities, assets, and owner's equity.
Assets can be divided into two types:
- Current Assets: Assets that can be quickly converted to cash or used in the day-to-day operations of the business. Examples include accounts receivable, cash, and inventory.
- Fixed Assets: Assets that a company holds for a long period of time, such as equipment and machinery, land, and buildings.
Liabilities can also be divided into two types:
- Current Liabilities: Obligations that must be paid in the near future, usually within one year. Examples include accounts payable and taxes payable.
- Long-term Liabilities: Obligations that must be paid in more than one year. Examples include notes payable and long-term loans.
4. Company Management Overview
This section contains a list of the names of managers, supervisors, and officers along with their respective positions.
You can also include information about changes in the management structure. Then, note if anyone changes their main role or task that affects the business.
Write as much information as possible about business management to increase transparency and build trust for stakeholders who review your financial statements.
According to a study, high transparency practices in preparing financial statements can increase investor confidence and have a positive impact on the company's stock price.
This shows the importance of presenting financial information clearly and transparently to build investor confidence and maintain stock price stability.
5. Footnotes
This section is where you provide additional explanations for some things in the report that may require further explanation. It can be about complex things or certain details that need to be clarified.
By adding footnotes, you provide a better understanding to the reader and ensure that all the information provided in the report is clearer and easier to understand.
Managing finances effectively is the key to business success. With the right steps, you can produce financial reports that are useful for all parties involved.
Interested in learning more about how to create financial reports? Register yourself now to take a class on how to analyze good and correct financial reports. Click here for more info!
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