Finance

How to write a finance report

Allison S Robinson | 29 July 2021 | 3 years ago

How to write a finance report

The phrase ‘financial report’ can make some business owner’s hearts race, others groan, and others look forward to them. When you write a financial report, you merely state the business’s financial health in a standard, well-known format, making it easier for stakeholders to read. Publicly traded companies are obliged to produce them, but that doesn’t mean you should avoid them as a small business. They are a super helpful, concise tool that you will learn to rely upon.

When writing up a finance report, you are presenting the current financial position of the company as well as the future vision and business plan. A financial report or statement is a vital component of your business plan and is used to motivate investors to invest or banks to give loans.

Here we’ll look at some tips on how to write a finance report.

Where to start?

As with most things in life, this report starts with the basics, which are the daily operational bookkeeping. Your finance report will be fleshed out with data extracted from the bookkeeping system. This is when you will learn to appreciate the benefit of having a good bookkeeping software system and a bookkeeper that has kept it comprehensively and accurately updated.

The finance report is always confined, in its reporting parameters, to a specific time period, i.e. the first quarter, the last year or the last three years etc.

The data extracted from your bookkeeping system will populate the following components of the financial report (if your software doesn’t automatically create these reports for you already):

  • Balance sheet
Here you will list the assets of the business relative to your chosen time period. You will also list the relative liabilities of the business and any shareholder equity. The latter is the amount of money that the owner, partners or shareholders can extract from the company after the total liabilities have been extracted from the total assets.

There is a sub-component of shareholder equity called retained earnings. This figure is any amount of net earnings (shareholder equity) that was not paid out. Therefore, It should not be combined with cash balances nor liquid assets.

The layout of a balance sheet has assets, e.g. equipment, property, etc., listed on the left. Cash on hand, financial assets and bank balances also form part of this list.

You will then list your liabilities on the right-hand side. This will include outstanding debts you still have to resolve (accounts payable), those hungry credit card balances, any bank loan outstanding balances or any other form of financial debt your company is obliged to resolve.

Add up the assets and liabilities, deduct the total liabilities from the assets and the answer is labelled: Owner Equity.

  • Income sheet
This section of the finance report displays the company’s revenue (gross income) from all revenue streams as well as its expenses, income (net income/profit) or loss. Again, this is only for the specific time period you have chosen.

The income sheet is split into two sections: operating and non-operating.

The operating section lists revenue and expenses. Examples of revenue are any cash paid in for the sale of products or services.

Examples of expenses are payments made to purchase goods, materials or components (directly related to the items/services sold in the specific period), general administrative costs, depreciation of assets, R&D expenses, payroll, utilities and logistics.

The non-operating section includes gross income and gains from secondary business undertakings. These could be ad-hoc or infrequent such as interest earned, and an expense example would be tax expense.

The bottom line of the income sheet is obtained by deducting total expenses from total income.

  • Cash flow statement 
This 3rd component of a finance report literally shows the flow, in and out, of cash during a period. This document is also split into three sections or “activities”: operating, investing, and financing.

The cash flow statement is critically important. It could show a negative cash flow overall, but if the business has positive cash flow from operations, then the overall negative is not an immediate sign of business trouble.

Investors and analysts look at cash flows because accounting anomalies are removed. Operating cash flow, in particular, shows the reality of a business’ operational health, e.g. a huge sale equals huge revenue, but non-payment of the sale means that deal is a skewed economic picture.

What does the different finance report terminology mean?

Assets 

This is a presumed economic benefit to the company that can be drawn upon in future. It is obtained from previous transactions.

Comprehensive income 

This refers to changes that occur in the equity balance. Remember, equity is a net asset. The change, for a specific period, is due to transactions and other events and circumstances from external sources, e.g. investments made or dividends distributed to owners.

Distributions to owners

This refers to deductions from net assets by moving assets out of your books or an owner taking on a liability, e.g. a debt. By actioning a distribution to an owner, their ownership interest is reduced.

Equity

This is the balance leftover after total liabilities are deducted from total assets. In a company, the equity is also called an ownership interest.

Expenses

This is when cash/money leaves the company, or an asset is irrevocably used (i.e. not rented and returned), or a liability is taken on. This can be due to delivering products to clients or the manufacturing of products or a service that is core to the business.

Gains

This is a positive change to equity due to transaction, but it excludes transactions resulting from revenue or investments by the business owner.

Investments by owners

This is an increase in the business’s net assets. This can occur due to incoming transfers from external entities that bring in value to increase ownership interest/equity in the business.

Liabilities

This is a presumed economic sacrifice due to current transactions, which may or will require the paying out or moving out of assets in the future.

Losses

This is a reduction in equity after all business transactions and circumstances, for a specific period, are netted out against each other.

Revenues

This is the inward flow of assets, or a liability settlement, due to manufacturing products, delivering them, providing a service or other core business activities.

Topic

Finance

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