Financial Reporting and Its Effect on Reducing Risks in a Business
By Mert Bildirici
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Financial reporting is defined as providing key information about the company’s financial performance over time to its shareholders and stakeholders. It is done to inform the investors of the company and to be as transparent as possible when conducting business. However, the scope is not limited to investors only; government and private regulatory institutions also monitor financial reporting to ensure fair trade, compensation and financial activities. Companies use financial reports to organize accounting data and report on current financial status. Financial reports are also essential in the projections of future profitability, industry position and growth. Many financial reports are available for public review. Financial activities of a firm are typically reported on a quarterly and yearly basis. Some of the measures in the financial statements include, but are not limited to, tracking cash flow, evaluating assets and liabilities, analyzing shareholder equity, and measuring profitability.
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Financial reports are important because they allow the company to monitor income and expenses, ensure compliance, communicate essential data, and support decision making regarding the future of the company. There are several types of financial reporting statements. These are balance sheets, income statements, cash flow statements, and statements of shareholder equity. Although all of these are analyzed by different people for different purposes, they all allow one to learn more about how the company is operating and how the future looks like. People who look at and analyze financial reports could be divided into several categories: investors and shareholders, executive managers to review performance, regulatory institutions such as IRS and SEC, industry consumers, and unions to make sure employees receive fair wages and treatment in the workplace.
Data analytics, on the other hand, is the science of analyzing raw data to make conclusions about that information. Many of the techniques and processes of data analytics have been automated into mechanical processes and algorithms that work over raw data. This is necessary as humans are not able to consume and analyze that amount of raw data, and even if they do, it takes a longer time compared to these algorithms. There are 4 major approaches to data analytics: looking at what happened (descriptive analytics), why something happened (diagnostic analytics), what is going to happen (predictive analytics), or what should be done next (prescriptive analytics). Financial reporting and data analytics go hand in hand with these approaches as the raw data is organized in a way available to human consumption by the use of data analytics and the financial reports present that to others.
In this paper, I am going to focus on how financial reporting and data analytics could help reduce risks and prevent fraud. As mentioned, financial reports and statements allow the company to be as transparent as possible with its shareholders and stakeholders. This way, people who invest in the company are fully informed on what they are investing in. Also, the company is encouraged to conduct their business as right as possible in order to not lose any investors.
Data analytics help the senior executives of the company make decisions: this can only be done with advanced algorithms that project future predictions about the company’s situation. With these analytics, the executives are able to decide where to invest in or whether to redirect their sources into some other field. This by definition reduces the risks of conducting the business. It helps the company stay on track without committing fraud as well, which builds a trust relationship with its customers and investors. Not only data analytics help decision making, but they also eliminate the risk of human mistakes. Most of the data is automatically processed, which leaves no room for error or fraud.
One way financial reporting reduces the risks within a company is by helping identify trends. Internal analysis of a company’s financial reports can help the company spot trends in the business so that it can exploit emerging opportunities and mitigate risk from potential challenges. The reports help the company manage cash flow by helping them stay on top of its cash balances and monitor cash inflows and disbursements, all of which is vital to businesses of all sizes and industries.
Finally, the statements help with enhancing working capital management. Real-time financial reporting helps senior management calculate and balance adequate current assets in order to meet current liabilities without creating an unde- rutilized surplus. In a similar fashion, it helps manage debt, especially debt related to revolving credit lines and other short-term credit facilities, like credit cards. Companies would want to show as less debt as possible to their inves- tors in order to ensure that they don’t lose any of the invest- ments.
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Overall, both data analytics and financial reporting are useful tools that help companies stay on track with their monetary situations. Data analytics help companies convert raw masses of data into understandable smaller chunks of data, so that the team can decide on what to do next. Financial reports are used to convey the data to the shareholders of the company. These help them to decide whether to invest in the company or not. Another major issue financial reporting and data analytics help the company is by preventing committing fraud. Since the company is obliged to be transparent in its financial reports, they are encouraged to conduct business under ethical and practical norms. This also helps the company in the long term, since if they commit a fraud and they get caught, it might mean the end for the company.
