Financial reporting holds a significant value in determining the company’s financial position and based on that, business owners make future decisions for the organization’s growth. It is also imperative from the point of investors and filing taxes. Financial reporting gives visibility into the business performance and helps investors to decide on investments. Likewise, accurate financial reporting clearly depicts the taxable amount and minimizes errors in filing taxes. Trend identification is another advantage of financial reporting that enables organizations to match the market pace. Besides this, financial reporting helps CFOs and finance executives to become more strategic in optimizing the brand’s value and reducing financial risks.
Financial reporting involves mainly three statements: balance sheet, income statement, and cash flow statement. Accurate financial reporting is of significance in driving meaningful insights and is critical in driving business growth. It is a complicated task, especially in a volatile market. Therefore, most business organizations rely on the latest technology and software solutions like accounting software to simplify the financial reporting process. As per the survey, global accounting software is expected to grow at a CAGR of 19.6% from 2021 to 2030. The global accounting software valued at $11.9 billion in 2020 is estimated to reach $70.2 billion by 2030.
Main Challenges In Financial Reporting
- Slow manual process: Conventional method for financial reporting involves excel sheets and spreadsheets. The process is pretty slow and inaccurate. There is always a chance of entering the wrong data or missing out on the data. The process is slow and consumes an accountant’s enormous time in accumulating data and generating financial reports.
- Mismanaged cash flow: Monitoring accounts receivable and taking follow-ups on the pending amount is critical for smooth cash flow. If an account receivable takes time to pay, then business owners need to identify and resolve the problem soon. Unable to resolve due payments can depict an organization’s weak financial performance, and it can reflect on financial reports.
- Unofficial earning measures: Unofficial earning measures often referred to as Non-GAAP or Non-IFRS measures of earning are used by the company to show operational performance. The most common form of non-GAAP measurement in accounting is EBITDA (earnings before interest, taxes, depreciation, and amortization). It does not include irregular expenses or non-recurring costs. Some companies try to exclude recurring costs by showing them as non-recurring costs and project the company as a profitable entity. Non-GAAP or Non-IFRS techniques can make it difficult for investors to compare the company’s earnings with the competitors.
- Outdated data: Sometimes the financial reports that management receives are not the latest or outdated data. Organizations that rely on conventional accounting practices and submit reports at long intervals cannot present the right financial report.
Top Ways to Simplify Financial Reporting
- Invest in accounting software: Accounting software automates financial reporting and minimizes manual intervention. As per one of the reports, eliminating manual work and enhancing the accounting process efficiency are the main reasons for adopting accounting software.It also provides a larger view of the company’s financial status and helps to consolidate financial reports across different countries. Besides that, business models operating in a highly volatile market often have to deal with evolving regulatory compliances. The accounting software assists in real-time regulatory compliance tracking and enhances financial reporting accuracy. The centralized accounting system safely stores all the documents in one place and has minimal chance of misplacing them. Further, the cloud-based accounting software enables staff to get updated reports anytime and anywhere. Accounting software can help in myriads of ways to streamline financial reporting. The software allows adding custom calculations and modifying the layout of the report (columns and rows) to comprehensive financial data with ease. In addition, the software allows presenting the data in charts, maps, and diagrams and helps to interpret complex data in a more lucid way.
- Maintain effective collaboration: Effective collaboration across the team and organization is a prerequisite to simplify financial reporting. It is possible only when the organization can communicate and collaborate in real time. Business owners can take the help of accounting tools that easily integrate with the communication tools and technology for seamless communication.
- Perform financial statement audit: Auditing the financial statements from qualified external auditors can help identify the issues and check whether the financial reporting is done according to accounting standards (GAAP or IFRS). The auditor makes sure that the financial reports are free from material misstatements.
- Avoid making changes to a closed period: When a period is closed, it means that no more accounting transactions can be posted to the accounting period. Making changes to the closed accounting period can impact the financial statement and present wrong information. Unfortunately, many times accountants can post transactions to a closed accounting period. Once again, accounting software can be a pretty useful tool to avoid posting in a closed period. Most accounting software comes with a feature to set a password for the closing period. So, if anyone tries to post a transaction in the closing period, the individual gets a warning or alert about that transaction.
- Review financial statements at regular intervals: Financial reporting problems occur when the accountant doesn’t follow the best accounting practices, like reviewing financial statements at regular intervals. Sometimes bookkeepers change accounting reports to leverage tax advantages, or show business is financially strong. Such practices can be avoided when an online, digital financial reporting software is used to gather the reports in real-time with the actuals.
- Stay consistent with bank reconciliation: For accurate financial reporting, it is recommended that business owners reconcile bank accounts every month. It helps to detect the error early on. Accounting software can be helpful to automatically perform bank reconciliation and ensure that the reconciliation process is carried out without fail.
Accurate and timely financial reporting is critical for every business today. Managing the financial reporting activities with the help of the best accounting software can potentially bring advantages to the companies in several ways. Accounting software can assist accountants in gaining better control over the accounting process and simplify the financial reporting process.