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With the End of Financial Year (EOFY) fast approaching, SMEs are now starting to prepare financial reports. But more than a mandatory report to be submitted to the taxation office, financial reports play a critical role in building a successful business. Financial reporting and analysis offer insights into financial data that will help you make better business decisions, eventually improving the business’s financial performance.
We’re providing you with a comprehensive guide to help you understand how crucial financial reporting and analysis are to your business. In this article, we will explore the importance of financial reports and how they benefit different business stakeholders.
Financial reporting is a standard accounting practice that documents the company’s financial data. This data helps companies understand their financial health and performance in a specific period. Based on the report, they can make informed business decisions.
Financial reports are useful for businesses and for, investors and banks. Based on these reports, an investor or a bank invests or gives loans to a company. Suppose you plan to expand your business, and a bank will grant a loan based on your company’s financial report. If the company is financially healthy, then you can expect a loan for your business expansion.
The use of spreadsheets for financial reporting is widespread across businesses worldwide. However, spreadsheets can fall short of capabilities to generate efficient financial reports as a business grows and more users, data, and formulas are added to the reports. Financial reporting has become more efficient and sophisticated thanks to digital technology.
More and more businesses are now adopting the use of ERP platforms to streamline their accounting, automatically generate financial reports and even provide data-backed insights. Integration with other solutions, such as Accounts Receivable automation, further improves accounting software’s capabilities to create fast and accurate financial reports.
An income statement or profit and loss statement essentially show a business’s loss or profit during a specific period. It’s a summary of key sales activities, costs of production, and any other operational expenses within the accounting period. This statement aims to understand if the business is making any money or suffering losses.
A balance sheet provides an overview of a company’s overall assets, liabilities, and stakeholders’ equity. Broadly, the balance sheet reflects the financial health of a company. By analyzing this sheet, the company’s management can see where the business is heading.
The balance sheet is not only useful for the management but also for investors. By assessing the balance sheet, investors can form an opinion on whether to invest in a specific company or not. The sheet has all the vital information like the company’s finances and other data to help them make an informed investment decision.
A Cash Flow Statement (CFS) documents the amount of cash coming into the company and the cash flowing out of the company during a specific period. The statement includes elements of both the income statement and balance sheet. CFS is critical because it tells the business owner or management about the company’s cash position. Businesses need sufficient cash all the time. They require cash to pay expenses, loans, taxes, and equity purchases. A cash flow report tells if the company has sufficient cash for carrying out such activities.
Now that we have seen what financial reporting is let us explore some benefits of financial reporting.
The poor management of debts can be disastrous for any company, whether small or big. When it comes to debt management, several financial reporting platforms are available that will help you track your company’s current assets, current liabilities, accounts receivables, and liquidity. AR automation software provides data on your customer’s credit scores that can help you gauge how to manage debts effectively.
Financial reporting helps identify seasonal trends or cycles that can help you plan ahead. Understanding trends and the historical context of numbers empowers you to improve your business’ performance effectively.
Updated financial reporting provides you with real-time insights into your financial health. Thanks to advancements in technology, access to real-time data are possible and provides you with the ability to take action to either correct issues or take advantage of opportunities. Cash Flow statements, for instance, provide you with information about the company’s availability of funds which will help you ensure you always have money to cover payments.
Managing liabilities is paramount for any business, especially if the business is looking to apply for a bank loan for expansion. Defaulting loan payments is seen as a red flag by banks that can reject the application for a loan. A financial reporting template allows for exploring current liabilities. Based on the data, the company can determine if it is required to reduce liabilities before applying for a bank loan.
Complying with the rules is essential for the survival of any business. Maintaining updated financial reports help your business comply with the regulations set by the governing body.
Management of cash flow is essential to any business. If you face challenges with the cash flow, financial reporting metrics will let you know the root cause of the problem.
With benefits covered, let us get to the crux of the topic – The Importance Of Financial Reporting.
Financial reporting offers a wealth of insight into financial data that helps make better business decisions. Apart from this, there are many other reasons. Let us look at each one of them in detail.
The biggest reason for performing financial reporting is taxes. For instance, you need to lodge EOFY tax returns and other financial reports in Australia. These reports are mandatory by law to ensure that a company pays its fair share of taxes. Before filing taxes, an audit is also necessary, and accounting and auditing firms review financial reports to ensure accuracy and credibility.
Financial reports are critical for attracting investments. If you are looking to expand your business, the investor will surely ask for the company’s financial report. The investors will examine the report to see how the company is performing. Is it earning profits? Or is it at a loss? How is the company managing its cash flow? These are some key indicators that investors examine.
If your company’s financial health is not optimal, no matter how excellent your product/service is, most investors will decline to invest in your company. Similarly, when you apply for a business loan from a bank, the bank examines your company’s financial report before lending the loan. Based on the information gathered from the report, banks can determine if the company can repay the loan.
A financial report is one of the essential tools for making better business decisions. For instance, if you want to open a new branch, a financial report can help you gain insights. You can assess crucial information like the company’s cash flow to identify if you have enough capital to expand and maintain solvent for daily operations. However, it is necessary to have detailed financial reports based on accurate data to make such decisions.
In a survey conducted by Deloitte, most respondents identified an insufficient level of details as the main issue in financial reporting, as this can affect financial performance assessments. The advent of modern accounting software has mitigated inaccuracies from old financial reporting techniques, leveraging data and automation to reduce errors in financial reports. These software solutions often have an intuitive dashboard that provides businesses with critical information in an easy-to-understand format to help them make better financial decisions.
Financial reports help in fostering trust with stakeholders. Accurate and transparent financial reports – backed by data – help convince stakeholders about your business’ performance. Leveraging technology helps build detailed, accurate reports that provide your stakeholders with the information they need to understand your business’s financial position and performance.
Throughout the article, we’ve often mentioned several entities that can benefit from financial reporting and analysis, such as investors or lenders. Here is a list of other entities.
Business managers use financial reports to help them track and measure the performance of an organization. With deeper insights, they can then devise intelligent strategies to improve the company’s financial health.
These groups use financial reports to check if the businesses comply with tax regulations. Financial reports are also reviewed as part of the auditing process.
Customers use financial reports to judge whether a company is reliable to do business with. They examine the statements to ensure that the company is financially healthy and determine whether it can stay for a long period.
Financial reporting is essential for any business, regardless of its size. It helps you better understand the company’s financial performance and enables you to make the right decisions that help in the growth of your business.
Book a demo of ezyCollect and see how AR automation can help you keep track of accounts receivables and improve data accuracy in your financial reports.
Commonly known as O2C, the Order-to-Cash cycle helps your business accept and complete orders. The process manages your business’s order processing and accounting system from end to end. Though it may seem like the O2C cycle ends when an order is completed, several important steps follow it. Not only does O2C record significant payment details, but it also helps identify ways to optimise the process further.
It covers several functions that handle your accounting systems with ease and accuracy.
The O2C cycle impacts many aspects of a business, making its offerings beneficial to companies of all sizes. From sales analysis to enhancing a company’s B2B payments process, this cycle covers a variety of features that help manage:
B2B payments involve the purchase of goods and services through credit. Here, the process requires the business to approve the supplier’s credit application. Approval for credit requests and credit limits for each customer is also taken into consideration. To know how much credit to lend a customer, credit management professionals provide supporting customer credit reports, also known as trade reports.
The credit approval step also analyses the financial situation of the supplier. It takes into consideration various necessary details ranging from their cash flow to outstanding receivables. Once this is done, a set limit on customer credit is placed.
Credit approval professionals work in step with the sales team to set the payment terms of the order. These terms include due dates for payments, early payment discounts, and penalties for late payments.
In addition, the credit professional also takes care of minimising risk while maximising sales volumes. Being a high-stakes discipline, they also face the consequence of incurring losses and cash flow problems by extending credit improperly.
Sales teams connect with customers to share information on what services are available. Based on customer interest, sales professionals negotiate with customers on the order’s price, quality, delivery, and payment terms.
Ensuring the suppliers fulfill the terms of the order is a crucial part of the order acceptance step.
The step involves locating, preparing, and shipping the order. During the fulfillment stage, ensuring the date and location details of the shipment is of utmost importance. Here’s where automation plays a key role in streamlining the fulfillment process. Updating sales inventory counts on time is key to avoiding accepting new orders before the previous ones are completed.
If an unavailable item is accidentally purchased, the same needs to be recorded in real-time to avoid further issues in billing. Automating this process allows businesses to manage this step with ease and efficiency. Without involving manual assistance, automated services can easily fetch necessary order details and assure no bottlenecks in delivery occur.
Similarly, all services promised in the order are duly followed from end to end.
After delivery, accounts receivable professionals invoice the customer for the amount due. The invoice is either shared physically or electronically, depending on the order. Currently, the use of electronic billing via email has become more popular, overtaking older systems of faxing and telephonic billing.
Generating and delivering invoices to customers is crucial and time-sensitive work. The sooner a customer receives and clears a payment, the sooner the business stabilises its cash flow.
Customers clear payments in a variety of ways – ranging from paper checks to virtual credit cards. Here, the supplier must decide which forms of payment they are willing to accept. The supplier then sets up processes to increase the efficiency of receiving payments through these select channels.
To prevent incurring high costs associated with each payment, businesses need to manage their customer payment preferences with their own interests.
Post payments, the money is then applied to specific accounts. The process acknowledges the receipt of cash and marks the invoice as paid. Though seemingly simple, this step is a bit more complex than it appears.
As companies typically handle large quantities of payments on a monthly basis, the need to categorise them is high. Cash application specialists are responsible for matching these receipts with their respective invoices. Remittance advice assists this process as it comes inclusive with certain forms of payment.
Remittance is also sent through email or telephone, but this further complicates accounting systems and leads to inaccuracy. When certain payments are delayed or cover multiple invoices, further complications arise and require advanced solutions to ensure accuracy.
Clearing payments on time enables businesses to regain their cash flow for business operations and, in turn, replenishes credit limits for customers.
An account becomes delinquent if it does not clear its payments by the established due date. At this stage, the account transfers over to collections. The collectors are in charge of contacting and reminding defaulters to clear their dues.
In certain cases, customers intentionally delay clearing payments to better manage their cash flow or business credit scores. Collectors will get in touch with defaulting customers to understand and resolve their payment concerns to avoid the same.
Now that you understand the processes in the O2C cycle, let’s look at ways you can optimise it for your business.
Knowing how to enhance the Order 2 Cash process can give your business an edge over companies that do not. Reducing cost is only one aspect of this practice, the other benefits you stand to gain from investing in O2C solutions are numerous, and we’ve listed a few below.
Several value-added O2C strategies are applicable to the payment process. Some of which are intelligent invoice design and Electronic Invoice Presentment and Payment (EIPP). To roll out timely payments, customers need to understand how to use these invoices. Making use of integrated payment acceptance solutions helps speed up the invoicing process for both customers and suppliers.
Older methods like paper invoicing cannot be optimised efficiently due to the limitations of old school systems, however the good news is that most businesses are on electronic invoicing. Similarly, modern invoicing systems require multiple steps for delivery and payment, which can be time-consuming. Electronic invoicing significantly eliminates the delivery time and helps speed up cash flow between the customer and company.
The O2C cycle stays incomplete until the cash due is properly allocated to a specific record system. For a company to receive revenue through these payments, there has to be an automatic application of cash. Any delays in cash application result in a high days sales outstanding (DSO) and a low business credit score. DSO occurs when companies do not receive a payment well past their invoice scheduling date.
Since customers clear payments in a variety of ways, cash application becomes all the more challenging. Certain payment methods involve manual keying, which can be time-consuming and less efficient than electronic payment options. In some cases, even electronic payments can disengage from their respective invoice, requiring additional time and resources to find a match. Handling such instances without accounts receivables automation can be challenging.
Realistically, no matter how hard a business strives to reach a 100 percent match rate, there will always be loopholes and exceptions. Automating the cash application process not only cuts costs but also reduces DSO. With the help of technology, sellers can automatically transact data from any source and match it with open receivables. Whether customers clear payments by cheque or electronic methods, this process improves overall hit rates and minimises their time.
Implementing such tools helps businesses work through exceptions and can help post payments on time. Being resource-friendly, it also helps get the job done without depending on manual intervention.
O2C systems provide both customers and call center staff with secure access to research and print invoices and settlements. Some systems also let customers manage their own invoices with easily available web tools. In addition, O2C enables businesses to free up their resources for other tasks, allowing them to focus on customer experience and other vital operations.
It also helps identify possible areas that could use further optimisation to boost customer experience. Knowing which areas to customise for customers helps a business deliver service delight, which develops brand loyalty.
The strategic potential that Order-to-Cash can offer business is endless. The right approach creates an opportunity to improve your business’s cash flow and boost customer satisfaction. It also has the potential to help you achieve your goals for corporate sustainability while significantly reducing costs in the process.
Finding the right solutions for your business can be tricky and involve a bit of trial and error. But an important factor to note during the evaluation process is the flexibility these solutions can provide you with. You need a system that can accommodate strategic invoicing based on your customers’ needs. What’s more, is the ability of the system to manage both intelligent cash applications and electronic adoption.
These key capabilities will help suppliers achieve the right balance between buyer satisfaction and low DSO.
Accounts receivables are one of the most important components of your working capital. Receivables refer to the money which you must receive from your debtors, i.e., the people you sell your products or services to. When you get your payments on time, your working capital remains in good health.
But many people struggle to take control of their receivables process. When this happens, increasing cashflow becomes difficult and it becomes challenging to run your business operations.
Here we explore what you can do to ensure your accounts receivables practices work well and you optimize your collections.
Step 1: Make accounts receivables a key metric in financial performance measurement
Many times, working capital takes a backseat when we’re measuring company profitability and financial health. Typically, the section which companies falter with is the accounts receivables. When you don’t keep an eye on your receivables, it becomes difficult to identify any existing problems with our receivables process.
But, when you make your accounts receivables a KPI, you strictly track your receivables and you get a better picture about who owes you what. You’ll be able to identify customer accounts that are draining your coffers and amend those processes that are harmful to your working capital health.
Step 2: Bring your departments together to ensure a collaborative collection effort
Accounts receivables management isn’t just the prerogative of your company’s accounts department.
The sales team, which deals with clients on-the-ground, plays a huge role in getting collections faster. Additionally, your finance teams – who control budget allocations – affect the company’s ability to offer extended credit periods and limits to customers.
When your sales, accounts and finance departments work together, you will have a bird’s eye view of your accounts receivable management processes. You will be able to determine the exact payment terms and credit limits to be offered to each customer, to ensure you’re always repaid and have the lowest default rate.
One process to initiate here is a comprehensive credit check to gain credit insights about current and prospective customers. This credit check will give you information about the purchase and repayment history of your customers, whether there were any defaults and the frequency of on-time payment vs default. This way, you’ll be able to plan how to reduce your default rates and ensure you receive your payments and your working capital is optimized.
Step 3: Use a robust Accounts Receivables Solution to collate bills of the same customer
It’s easy to miss out on a specific invoice when the same customer has a hundred different bills. This is where Accounts Receivables Solutions like accounting software, order management software and a master excel sheet can help. They give you the means to bring together data that is completely staggered in your system and make sense of the overall receivables each customer owes you.
When you have this collated information in a single place, there’s a lesser likelihood of your missing any bills that need to be followed up. Plus, this will help you identify any wrongdoing that any customer might be doing to cheat the system.
Step 4: Automate your receivables to ensure you always get paid on time
Finally, the best way to optimize your working capital and get your payments is by automating accounts receivables.
Manual receivables management can lead to a lot of errors. You may either claim lesser than what is owed to you or accidentally include wrong invoice details that can reduce your credibility in front of your customers.
But software like MYOB, XERO & Netsuite can help you manage your invoices carefully. These tools also take control of the payment follow-up process, ensuring you don’t need to do the heavy lifting. Contact our team at ezyCollect for more information.
In anticipation of a significant increase in the number of small businesses being put into external administration following the end or temporary measures extended until 31st December, the Australian Government has today announced major changes to come into effect 1st January 2020.
The reforms will allow businesses with liabilities of less than $1 million to restructure their debt, similar to the Chapter 11 bankruptcy model in the United States.
The previous “creditor in possession” model will be replaced with the “debtor in possession” model, where businesses can restructure their debts without giving up control to appointed administrators.
Click here to read the Aust Govt. Fact Sheet released today.
Credit risk management is important in good times, in slow and uncertain times with less protection it is even more critical for businesses.
Businesses need to consider:
Credit risk management is all about good processes, systems, and data. But it does not need to be difficult, or time-consuming. To see how you can implement an effective system by COB today watch the demo.
After what has already been a torrid year for Australia with bushfires and Covid 19, October 2020 looms with:
Make it easier for your customers to buy, and more importantly for your customers to pay, with ezyCollect’s Pay by Instalments, available now.
We all know that no matter what we go through, the economy always bounces back. It’s a matter of staying afloat during the storm, and then capitalising on the recovery.
We’ve seen the success of companies such as Sydney’s Afterpay, with a current market value of $21 billion (as at 14/9/2020) after only 6 years. People will still buy, if it’s easy for them to buy.
Your customers do still want to buy from you, and indeed need to keep buying from you to keep their business turning. It’s about making it as easy as possible for them to buy, especially in difficult times. And where they have choices in suppliers, they will obviously turn to the supplier who makes it easiest.
It’s about helping your customers through the tough times, whilst ensuring your own business does not suffer. And history shows us time and time again, that companies who survive the tough times, generally do very well when the market recovers.