One of the most important documents that can influence business growth is the financial report. Because financial reports significantly impact business development, you must understand how to prepare a systematic financial report.
Good financial reports will help companies understand their overall financial condition. This way, they can take swift action to maintain or expand their business.
With systematic reports, management can evaluate the company's profitability, liquidity, and solvency, which are crucial for strategic decision-making.
Furthermore, structured financial reports can also provide a clear picture of revenue sources, expenses, and changes in equity over a specific period.
Therefore, a finance professional must thoroughly understand how to prepare a good financial report. If you'd like to learn more about this, here's information on how to prepare a good financial report. Let's take a look!
Benefits of Financial Reports
Before discussing how to prepare good financial reports, first understand the benefits of financial reports for a business/company. Here are some benefits of financial reports that you should know.
1. As a Source for Company Evaluation
A significant benefit of financial reports for businesses is as a source for company evaluations, typically conducted at the end of the month. In this case, financial reports provide a very clear picture of the company's financial condition for each period.
Typically, at the end of the month, companies will use financial reports to compare the current period's financial condition with previous periods. This can certainly be used as a source for company evaluation if the financial condition shows a decline compared to the previous period.
2. As a Source for Business Development Considerations
Another benefit of financial reports is that they can be used as a source for business development considerations. If a company's financial condition shows a specific increase in each period, this can be a consideration for future business development.
If revenue increases consistently over several months, companies can start considering setting aside a portion of profits for business development. This business development can take the form of investing in new technology, opening new branches, or developing products and services.
3. Monitoring Cash Flow
One of the equally important benefits of financial reports is monitoring cash flow. Financial reports will display all evidence of the company's cash inflows and outflows. Therefore, if any irregularities in cash flow are detected, the company can immediately identify them.
Monitoring cash flow is also important to determine the company's ability to cover operational costs.
4. Assisting with Tax Planning
Financial reports can also help businesses manage tax expenses more effectively. With clear reports, companies can identify tax liabilities that must be paid at the end of the tax period.
Furthermore, the information contained in financial reports can provide a clear picture for accountants or tax consultants in formulating optimal tax strategies.
This can be used to reduce annual tax liabilities and plan more efficient long-term tax management.
5. Measuring a Company's Ability to Repay Loans
An equally important benefit of financial reports is measuring a company's ability to repay loans.
The information contained in financial statements, such as net income, cash flow, and debt-to-equity ratio, provides a clear picture of the extent to which a company has sufficient liquidity and profitability to meet its debt obligations.
How to Prepare Effective Financial Reports
Business and corporate financial reports must be prepared well and effectively. A good report will provide a clear picture of the financial condition for that period. Here's how to prepare an effective financial report.
1. Prepare All Financial Data
The first step in preparing a good financial report is to prepare all financial data, both income and expenses. In this case, the company must have a special document or book that will be used to prepare the financial report.
A good finance professional must record all financial data in detail, both income and expenses. Don't forget to attach proof for each payment transaction.
In addition to income and expenses, accounts receivable and profits must also be recorded in detail to provide accurate reports.
2. Create a Master Cash Flow Statement
A good way to prepare a good financial report is to create a master cash flow statement separate from the main financial report. This cash flow statement is important for monitoring the company's cash inflow and outflow over a specific period in detail.
By separating the main cash records, companies can more easily identify and check the sources of cash income and expenses in detail, thereby minimizing the risk of errors in recording cash flows.
3. Group Transactions and Account Categories
The next step in preparing good financial reports is to group transactions and account categories. This grouping is important to make the financial reports more structured and easier to analyze.
Every recorded transaction must be grouped into the appropriate category, such as assets, liabilities, revenues, and expenses. Each category can then be further grouped more specifically, for example, into current assets (cash, accounts receivable, inventory) and fixed assets (land, buildings, equipment).
With proper grouping, companies can easily identify areas that need improvement, as well as areas that can generate revenue.
4. Create Inventory Records
Preparing good financial reports also involves creating inventory records. In this case, inventory records can be created outside the main cash register.
Inventory records are important for managing and monitoring a company's inventory, making it easier to record the cost of goods sold in the income statement.
By having accurate inventory records, companies can accurately determine the number of items in the warehouse, both those ready for sale and those in the production process.
5. Prepare a Balance Sheet
A good way to prepare financial reports is by preparing a balance sheet, which is one of the main financial reports that provides an overview of the company's financial position.
A balance sheet has three main components: assets, liabilities, and equity. Assets represent everything a company owns that has value, whether in the form of cash, receivables, inventory, or property and equipment.
When preparing a balance sheet, it is important to ensure that assets always equal the sum of liabilities and equity. In other words, the total value of a company's assets must balance the liabilities it must pay and the value of the owner's rights.
6. Prepare an Income Statement
An equally important step in preparing financial statements is preparing an income statement. The income statement shows the revenue, expenses, and profit or loss generated by the company during a period.
To prepare an income statement, the first step is to record all revenue generated, whether from the sale of products or services or other legitimate sources.
7. Prepare Closing Entries
Preparing closing entries is also an important step in preparing financial statements. Closing entries are used to close temporary accounts, such as revenue and expenses, so that the balances recorded in these accounts are not carried over to the next period.
The purpose of making closing journal entries is to ensure that the financial statements prepared only record activities that occurred during a certain period, and to start a new accounting period with a clean balance.
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