What Are The Advantages And Disadvantages of Financial Reporting?

January 3, 2022    Bookkeeping Perthwide

Financial reporting is a crucial aspect for public companies that operate on an open market. Public company holders do not take decisions based on their liking; they need to consider the opinions of the company's investors.

It is important to meet the criteria before launching a Company. In general, investment bankers need a private company to make $10 million to $20 million in yearly sales, with a profit nearing $1 million.

Before a company goes public, it may have doubts like whether it can maintain a respectable growth rate to attract investors. Is the public awareness created for the company enough for a successful public offering? And many more. If company holders know the answers to their questions, they might want to publicise their business. There could be various benefits or cons of displaying their Financial Reports. They need to analyse the situations and act accordingly.

Advantages of Financial Reporting

There are numerous benefits of financial reporting for a firm. Some of these advantages are-

  • Helps to improve the debt management of a company.
  • It helps to manage various problems through credit management and loan management.
  • It helps in tracking the accounts at any given time, this further helps in liquidity management. The information of available funds for business helps a company in creating expansion plans.
  • Financial reporting helps in identifying past and future trends.
  • Financial reporting is an essential tool for planning in a business. It can be useful for making sound business decisions, as there are firms that need accurate information on capital availability.
  • Financial reporting also helps in enhancing the quality of business decisions.
  • It helps to maintain transparency with customers
  • It helps to maintain the share prices of the company and treat all the investors equally

Read More:- Xero Bookkeeping: Tips Every Small-Business Owner Needs To Know

Disadvantages of Financial Reporting

Financial reporting also comes with quite a few drawbacks. The many disadvantages of financial reporting are as follows:

  • Financial Reports are Not Considered Futuristic

Financial statements give the financial data of a company from last year and hence it is considered historical. The analysis only helps in clearing picture of the past. The results are not applicable for forecasting anything in the future. However, creditors and stakeholders are more interested in a company’s future position. This is because they can make business decisions based on the company’s future. This is a limitation of using these reports.

  • Financial Reporting are Tools and Not Solutions

A financial report shows the profitability and strength of a company. But it does not say anything regarding how to enhance numbers and develop the business. Financial reporting services provide a good measuring tool for a company but give no solution for accelerating growth. That’s one of the prime reasons that financial reporting isn’t feasible for driving growth in the organization.

  • It ignores Price Level Changes

In particular cases, the price of commodities keeps changing. But the financial reports are depending on the current rates. Hence, if the price changes are not accountable, there could be problems in results.

In some cases, there might be an increase in efficiency when new prices are considered. But the actual efficiency could stay less due to uncertainties.

  • A Financial Report Does not Consider Qualitative Aspects

A financial report only shows the numbers, it does not consider human resources in the accounting process. These reports neglect the efficiency, technicality, and profitability of employees. Hence, a financial report does not measure the qualitative aspect that is involved in a business.

  • It Can Give Misleading Results Due to Lack of Reliable Data

A financial report is a calculation based on the data that is provided by a company. There could be misleading results If the data cannot be trusted. This is why these reports are not completely reliable.

  • Non-physical Assets Are Not Considered

A financial report considers the expense that are made to avail non physical assets like brand image. On the other hand, the non physical assets are not considered as assets by these reports. This creates a drastic change in the principal report when compared to the previous one.

Read More:- Important Things to Check When Preparing Your BAS

Associate With The Best Bookkeeping Firms

If you are running a business enterprise, financial reporting might be useful for you. To declare your financial status at the end of the year, you need to leverage financial reporting. There is a need to hire the best bookkeeping firms to maintain financial records. One could associate themselves with Bookkeeping Perth, one of the best bookkeeping companies in the area. They could easily do all the calculations and record the company's financial transactions in an organised manner. So, after weighing down the pros and cons of financial reporting, it would be better to associate with the leading bookkeeping experts.

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