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Know The Importance of Financial Reporting and Analysis
Admin 29 Dec, 2023 Introduction
Financing analysis and reporting involves communicating important and useful financial information collected by analyzing a company's finances, including revenues, expenses, profits, cash flows, etc. The company can utilize such information to make important strategic business decisions while ensuring compliance with tax laws and regulations. Financial reporting and analysis hold great potential in presenting the financial status of a business to its stakeholders and customers.
Every business performs financial analysis and reporting to some extent in two forms internal and external. They take help from financial analysis professionals with the appropriate credentials and expertise to properly analyze and report the company's finances. These professionals can be a part of their company (internal analyst), or they can be hired (external analyst). Today, financial analysis and reporting careers provide excellent growth opportunities with great salary and remuneration benefits.
In this article, we have explored the importance of financial analysis and reporting and have also discussed how you can make a career in this field.
What is Financial Reporting and Financial Analysis?
Financial reporting is the reporting of the financial status and results of the financial health analysis of an organization to the various stakeholders so that they can analyze the safety and security of investments made in the organization. Financial analysis and reporting must be done by minutely scrutinizing every part of the financial statements, as even a minor mistake may lead to confusion and loss of trust of the stakeholders in the organizational capability.
Financial analysis is also referred to as financial accounting and is mainly undertaken by the Accounts Department of an organization. Financial statement analysis involves carefully analyzing core financial statements, which include a balance sheet, income statement, cash flow statement, equity statement, annual report, director's report, auditor's report, etc.
Financial reporting is not only limited to the presentation of the summary of financial statements but also extends to communication of major decisions taken at the board meeting, litigations to the organization, information and directions from the management, etc. Thus, an organization's financial report holds extremely crucial information directed to those connected directly or indirectly to the organization. The reporting may be done annually, semiannually, or quarterly according to the organization's needs.
How is Financial Reporting Done?
A financial statement analysis uses certain financial analysis tools and techniques that accounting and finance professionals often use. Four of the most commonly used financial analytical tools are:
- Common size statements
- Ratio analysis
- Comparative financial statement
- Benchmarking analysis
These financial analysis tools and techniques provide a comprehensive idea about the targeted analysis area or an overall picture for proper financial decision-making.
Why is Financial Reporting Important?
Financial analysis and reporting provide vital information about the financial health of an organization. It also helps business owners and stakeholders make vital investments and other decisions as part of financial planning for running a general business of the organization. It also helps managers and business owners keep conformity to the local laws and requirements to enhance their reliability as a business.
Here are four distinct ways in which financial reporting is important.
- Raising Capital: A sound financial report of an organization with no discrepancies in its financial track record will be more credible to new investors and attract funds and capital for doing business and expanding faster. Even small companies and organizations can benefit from a transparent financial report to attract investment.
- Financial Analysis: Financial reporting is based on the financial analysis of cash flows in and out of the organization and how capital is utilized. It can help understand the effectiveness of internal management systems, such as the effectiveness of any novel program introduced or even calculating compensation for employees. It can also help predict the cash flows beforehand, giving the managers an idea to spend accordingly.
- Compliance with Law: A transparent financial report will be an effective tool for understanding the taxation system and correcting any discrepancies. It has two vital implications one is that the business is on the right side of the law, and the other is that complying with the local laws helps the business gain credibility in the eyes of the government. It can also help attract investment from local and foreign sources.
- Assurance to Stakeholders: A financial statement analysis gives stakeholders and an organization's clients the confidence to continue their association with the organization. The report shows them where investments have been used and how revenue has been generated in the given period. They can also get an idea of the plans and predict the future dividends that they can expect from the organization as Return on Equity (ROE) held with the organization as stakeholders.
As you can understand, financial analysis and reporting are a fundamental part of an organization and have a pivotal role to play in the smooth functioning of an organization. As such, the role of financial accounting professionals is indispensable in an organization. If you also want to be a part of this important industry, here's how to pave your way.
Finance Course
The best way to build a career in financial accounting is by taking a finance course in financial accounting or financial management. Here's how you can do it.
Financial Accounting Course
The most prominent way is to get accounting and finance certifications to build a career in accounting and finance. Certified Financial Analyst ( CFA) certification is a gold standard qualification in the field of financial analysis and accounting for candidates looking to expand their careers in their respective domains. Offered by the CFA Institute, it is one of the highly reputed and coveted certifications which pave a path towards higher finance analysis positions.
The CFA course consists of three levels of exams, and the curriculum of each increasing level has been based on the prior knowledge level and has become increasingly complex. Thus, it encompasses all levels and concepts related to finance to train an individual to become a holistic financial analyst. The CFA course can be completed between 18 months to 3 years, depending upon the individual capacity of the candidates.
Financial Management Course
Another way to build a career in financial management is by getting a bachelor's degree in finance or any related field or a BBA in Finance. A bachelor's degree takes three years, or an integrated finance course may take up to 4 years.
However, moving up to senior positions requires knowledge of advanced financial accounting, which can be done by pursuing higher degrees like an MBA in Finance or professional certification courses like CMA USA. It opens up many exciting opportunities in the finance world and can even help a standout performer to become the Chief Financial Officer or Chief Investment Officer at an organization. Pursuing a CMA USA takes around 1-2 years; however, with the help of the best coaching institute like NorthStar Academy, you can complete the course in 6-9 months. Overall, it requires almost 4-6 years of financial education to become eligible for some of the top-level positions at an organization.
Outlook on Finance Course
A bachelor's degree in the financial accounting field may help an individual to get an entry-level job in the field of financial analysis, but many finance graduates go back to higher studies, preferably an MBA, after having worked in the industry for several years. While it is not impossible for a finance graduate to advance their career to a higher level, it surely requires more expertise and training to get such confidence and career advancement opportunities.
Alternatively, when an individual pursues a professional financial certification like the CFA, they are trained per industry standard practices. So the amount of time they spend gaining experience and knowledge is far less than the other way around with the same or even higher level of efficacy. It is something that has to be considered while deciding which of the finance certifications to pursue to get a quick yet efficient route to the field of financial accounting.
FAQs
Q1. What are finance certifications?
To begin a career in financial accounting or management, finance certifications provide the necessary knowledge and credentials, which includes the knowledge of financial analysis tools, techniques, and practical skills. These finance certifications can help individuals demonstrate their credentials and expertise in the field of finance in front of their potential employers.
Q2. Why is financial planning important?
Financial planning is important for an organization in multifarious ways. It provides a statement of expenses and revenues which is necessary for planning future expenses of the organization. Sound financial planning also attracts existing and potential investors to invest more in the organization.
Q3. What are the tools for making financial decisions?
There are various tools for providing accurate analysis of financial statements, which include balance sheets, income statements, cash flow statements, equity statements, annual reports, etc. These tools include ratio analysis, such as financial ratios, solvency ratios, operating ratios, etc. Comparative financial analysis of various financial statements also provides a way to make financial decisions.
Q4. What is the most important in financial reporting?
Transparency and conformity to laws and regulations are the topmost important criteria to fulfill while preparing a financial report. It will enhance the credibility of an organization in front of the stakeholders and the general public as well. Such a huge responsibility for the accurate representation of financial data of an organization falls upon financial analysts, who are the backbone of these financial statement analysis reports.
Q5. What are the three most important financial reports?
The balance sheet statement, the income statement, and the cash flow statement are required to prepare complete financial reports.
Q6. What are the three pillars of financial reporting?
Financial reporting is based on three financial statements balance sheet statement, profit and loss statement, and cash flow statement.
Conclusion
Financial analysis and reporting are an indispensable part of an organization, but the burden of accuracy and precision of such an essential set of documents is upon the force working behind it tirelessly the financial analysts. Albeit it is a rewarding career and worth pursuing, it is also important to know which path will be the best to become a certified and credible financial analyst. The CFA course is one of the best financial accounting courses to pursue. It combines the knowledge and expertise required to handle the tasks of financial analysis and reporting from the basic to advanced financial accounting level.
To pursue the CFA course, you can enroll yourself in a coaching institute for CFA. NorthStar Academy provides a comprehensive, all-inclusive CFA certification course, including well-organized study materials, online classes, pre-recorded video support, and much-needed guidance from expert mentors like M. Irfat sir.