Financial reporting is the process of producing statements that disclose an organization’s financial status to management, investors and the government.
Financial analysis is the process of evaluating businesses, projects, budgets and other finance-related entities to determine their performance and suitability. … When looking at a specific company, a financial analyst conducts analysis by focusing on the income statement, balance sheet, and cash flow statement.
The primary objective of financial reporting is to provide useful information for decision making. The importance to our economy of providing capital market participants with information was discussed previously, as were the specific cash flow information needs of investors and creditors.
Financial reporting is important because it helps to ensure that companies and organizations comply with relevant regulations and, if it is a public company, shows investors the current financial health of a company.
Formal documents representing the transactions of a business, individual or other organization. Financial records maintained by most businesses include a statement of retained earnings and cash flow, income statements and the company’s balance sheet and tax returns.
Definition of Financial Data. Financial data consists of pieces or sets of information related to the financial health of a business. The pieces of data are used by internal management to analyze business performance and determine whether tactics and strategies must be altered.
Definition and information on Financial Statements Analysis. The purpose of financial statement analysis is to examine the past and current financial data so that a company’s performance and financial position can be evaluated and future risks and potential can be estimated.
While there are numerous benefits of having accurate and timely financial reports, we have identified few key benefits of financial statements.
1. Understanding The Financial Status of Your Business
The complete financial status of your business can be presented in a quality financial statement. The three main financial statements are the balance sheet, the income statement and the cash flow statement. The balance sheet reflects the owner’s equity after the liabilities are subtracted from the assets. The income statement which is also known as the profit and loss statement shows the profit derived from income over a defined period of time. A cash flow statement is a valuable tool for showing if there is enough cash coming in to pay for the operations of the business. A cash flow can be projected out over several months. The Income Statement shows how the restaurant and hotel perform over a period of time (i.e. a week, month or year). It takes all restaurant and hotel expenses into account, from prepaid expenses to expenses paid in the future. Overall, theIncome Statement tells the operator if the business is making a profit. From there, the operator can begin making changes in policy and implementing strategies that will help the restaurant achieve its goals. Should new sales programs be implemented? Does food cost in line with menu prices? Is the restaurant hitting its budgets? Can the owner(s) make distributions to the partners? These are some of the key questions that need to be addressed. The basic formula for an Income Statement is:
Sales – Cost of Goods Sold – Expenses = Profit/Loss
The Income Statement is everyone’s favorite financial statement to review because it reveals the nature of the restaurants and hotel success. Restaurant and Hotel financial statements should be broken down into the following categories:
• Sales/room revenue
• Employee Benefits
• General and Administrative
• Other Income
If sales and expenses are broken down into specific categories, the operator can easily compare and analyze his or her restaurant and hotel to industry standard percentages. Timely financial reporting will help to control the cost of goods sold like beverage cost food cost
The health of a restaurant and hotel can be analyzed from the Balance Sheet at any point in time (i.e. today, last month or tomorrow). The Balance Sheet allows operators to forecast short and long-term cash flow. As important as it is to review the Balance Sheet, few restaurants ever bother to prepare it. By checking the accuracy of the Balance Sheet, an operator can ensure the accuracy of the Income Statement. The Balance Sheet lists all the assets, liabilities and equity of the restaurant. The formula for the Balance Sheet is:
Assets = Liabilities + Equity
In the simplest terms, assets are what the business owns such as equipment, inventory or cash. Liabilities are what the business owes such as vendor bills, loans, notes, and leases. Even a gift certificate is a liability because the restaurant owes someone a meal at a future date. Equity is the ownership of the business.
It is important that assets and liabilities are properly classified on the Balance Sheet. To get a clearer picture of the business, an operator should break down the Balance Sheet into subcategories. The breakdown is explained as follows:
• Current Assets: assets with the life less than a year (i.e. cash, credit card receivables, inventory and prepaid expenses).
• Fixed Assets: assets with a life greater than a year that directly attributes to producing revenue (i.e. equipment, computers, furniture and leasehold improvements).
• Other Assets: assets with a life longer than a year that is not directly involved in the production of revenue (i.e. security deposits, trademarks and artwork).
Liabilities require a similar classification and are broken down as follows:
• Current Liabilities: debts due within one year (i.e. accounts payable, accrued expenses, short-term loans and even gift certificates).
• Long-Term Liabilities: debts due that extend beyond one year (i.e. notes payable or long-term leases).
There is so much information to be gained from the Balance Sheet. For example, a restaurant and hoteliers that have large debts may have major cash flow problems. Identifying the current debts from the long-term debts on theBalance Sheet help determine the short and long-term cash needs, as well as the business potential success. Restaurateurs and hoteliers who take on large debts upon opening could be shooting themselves in the foot. The restaurant may show large profits based on the Income Statement, but the restaurant may not have money because it is paying out the outstanding debt (which is revealed in the Balance Sheet).
Most restaurants and hotels are set up as Partnerships or Sub Chapter S corporations, they have to explain all business expenses and income to all partner.
Financial statements reveal how much a restaurant owner and hoteliers earns per year in sales. The sales may fluctuate, but financial planners should be able to identify a pattern over years of sales figures. For example, the restaurant owner and hoteliers may have a pattern of increased sales when a new product is released. The sales may drop after a year or so of being on the market. This is beneficial, as it shows potential and sales patterns so executives know to expect a drop in sales.
3. Financial Statements Will Help Prepare A Budget And Make Financial Decisions
Timely financial reporting will help you prepare a budget and make an easy way to take the financial decisions to grow the business.
4. Improved financial management
Timely financial reporting helps you to examine and correct any weaknesses in your financial systems. Improved financial management allows you to focus on current financial matters and develop future plans.
5.Better resource management
Due to timely frame financial report the restaurant owners and hoteliers will get accurate numbers of resources, therefore, they can use optimum use of all resources.
6. PERFORMANCE EVALUATION
Under this type of accounting practice, Business Owners may assess the performance of the Employees in the financial performance of the business.
Connivia Accounting Solutions can help in preparing the timely and Accurate financial reports for business owners and do the analysis of numbers and gives a recommendation to better run the business.
For any further question on financial reporting and accounting feel free to email me at Ram@connivia.com