Financial reporting is a key aspect of modern business. Financial analysis and reporting provide valuable insight, enabling companies to stay compliant while making more efficient decisions about their income or expenditure-focused initiatives.
Evidence-based reporting done correctly can benefit SaaS companies by improving the accuracy and timeliness of financial information, which allows a company to make significant changes in the area necessary for doing business.
Financial reporting is a vital part of the accounting operations for software as a service (SaaS) companies. Financial statements provide an impartial accounting of business transactions and allow management to make informed decisions about future company growth.
Financial reporting also allows SaaS businesses to grow, expand, and innovate by presenting accurate data on current financial status, forecasts, trends analysis, etc. In addition, financial reports help managers plan budgets, which can be used in their decision-making processes, such as capital expenditures or hiring new employees.
The importance of financial reporting benefits the SaaS company and helps protect the business owner and other stakeholders from fraud and abuse while ensuring transparency in compliance with government regulations or industry standards.
What Is Financial Reporting?
Financial reporting is a system of providing financial information about an organization to show the company’s actual economic performance and position. Financial reports are usually prepared by public companies and filed with regulatory agencies or made available on their website for investors who follow them. Financial statements provide information about what was done with:
- Assets
- Liabilities
- Equity
Financial statements also show what was done with the profits, or earnings, of a company – This also works for private companies as it shows their net income, and the cash flow statement presents that information in detail. Financial reporting is the process by which those numbers are put on paper for public consumption via financial statements such as balance sheets, income statements, and cash flow analyses.
Companies have a duty for transparency, and the seriousness of that is proportional to how related financial information is distributed.
The success of a software-as-a-service company relies on the accuracy and timeliness of its financial reporting. An organization’s financial reporting does not offer too much insight into its culture or management, but they are integral to the success of any company.
What Are The Benefits Of Financial Reporting?
Financial reporting is an integral part of running a business. Financial reports show the financial success or failure of your company for a specific period and can be used to forecast future outcomes as well. Financial statements often provide valuable insight into how much money you have made in sales, where it has come from, and what expenses are coming up next quarter. Among the most common benefits for SaaS companies are:
Better Debt Management – Financial reports are crucial to a company’s ability to manage debt. Financial statements provide clarity about the past and present of your business for you to plan ahead.
Exit Strategy – Financial statements can be extremely valuable when it comes time for an exit strategy or sale of the company. They should not just sit on a shelf gathering dust, but they should be updated regularly.
Accountability – Financial reports are often used as a way to hold employees accountable for their actions and performance.
Differentiation – Financial reporting can also help differentiate your company from competitors by showing what sets you apart from the rest of the pack.
Identifying Trends – Financial reports can help identify trends in your company’s finances, helping you make better business decisions.
Liabilities – Financial reporting can help identify potential liabilities before they happen. Financial reports often include a list of what is owed and how much has been paid, which helps you determine if any problems are coming up in the near future.
Liquidity – Financial statements also provide insight into liquidity for your company; whether or not it will be able to pay its debts in the future. Financial reports can significantly influence whether or not your company is deemed “healthy” by investors, customers, and partners.
Revenue Recognition – Financial statements also provide insight into revenue recognition for SaaS companies. They help you determine when to recognize revenues from sales that have been made, which helps with forecasting future revenues. Financial statements can also give insight into whether or not revenue has been recorded correctly, which is a key element for taxation and financial reporting purposes.
Gain Financial Insight – Financial reports are often used to gain specific and actionable insights about your business that will help you run it more efficiently in the future.
Better Cash Flow Management – Financial reporting also helps you to better manage your cash flow, which in turn will help with overspending and how the company pays its employees. Financial reports can tell you whether or not you have enough money coming from sales for payroll expenses, as well as if there are any expensive expenditures on the horizon.
Why Is Financial Reporting Important?
Statistics indicate that businesses that are able to leverage data to undergo more informed decisions and create more proficient marketing reports are also able to increase their marketing productivity by 15 to 20%. The same thing also applies to the financial sector. Accurate and timely reports can benefit the SaaS organization by providing the accounting team, senior executives, business owners, and other stakeholders with snapshots of all of its activities.
Suffice to say, the importance of accurate and timely financial reporting cannot be understated, especially when it comes to SaaS organizations. Below are several reasons why this is the case:
Financial Transparency
A significant benefit of accurate and timely financial reporting is that it should provide the finance team, the executive team, and other stakeholders with an understanding of how the business operates. Financial transparency can be achieved through many metrics, such as:
- Operating expenses vs. income ratio;
- The ratio between executive compensation and the average employee’s pay;
- Financial statements that categorize the different types of expenditures.
This level of transparency can help maintain stakeholder confidence. It will also enable them to make more informed decisions about how they should invest in or divest from the company. Financial transparency is vital for SaaS organizations because many stakeholders are wary when investing money into software companies that are not yet profitable. By providing stakeholders with an understanding of how the company operates and what it is doing to increase profitability, transparency will go a long way towards alleviating this skepticism.
Financial transparency also helps shareholders keep tabs on accounting performance to make informed decisions about their investments.
Tax Liability Evaluation
Another benefit of accurate and timely financial reporting is that it will help SaaS organizations to evaluate the level of tax liability they are subject to. Financial statements provide this information in two ways:
- The balance sheet lists all assets, liabilities, equity holdings (such as stocks or bonds), and net worth at a specific date.
- Financial statements that categorize the different types of expenditures (e.g., by cost type) can be used to determine how much money was spent on certain areas, which in turn will help calculate tax liability.
Financial reports provide a crucial source of information for SaaS organizations because they not only offer guidance as to what expenses should be deducted from the gross profit to calculate net income, but they also show how much tax liability is owed.
Error Mitigation
In addition to financial transparency and tax liability evaluation, accurate and timely financial reporting will also help SaaS organizations mitigate errors in their accounting. Financial statements provide information about the types of expenditures made (e.g., by cost type), which can be used to analyze any discrepancies between what is actually spent on certain areas as opposed to what should have been spent on those areas.
This will not only help to maintain stakeholder confidence, but it also helps SaaS organizations better understand the source of any errors that may exist in their accounting and subsequently correct them before they become too large.
Trust Building
The transparency that accurate and timely financial reporting provides for SaaS organizations is beneficial in many ways. Financial statements can be used to verify the accuracy of any accounting discrepancies, mitigate errors by providing a better understanding of how expenditures should have been spent on certain areas as opposed to what has actually been spent on those areas, evaluate tax liability obligations, and establish trust with stakeholders.
Financial transparency can go a long way towards alleviating skepticism from investing in SaaS organizations and will help to increase profitability by providing an understanding of how the company operates, which in turn helps shareholders make more informed decisions about their investments.
Takeaway
Financial reporting is among the most crucial aspects of any business, and it’s no different for software companies. Financial statements aid investors in determining how to best allocate their capital; they help managers make sound decisions about future investments and expenditures, and they provide a benchmark against which management can measure its performance.
Financial reports also serve as an audit trail so that company executives can identify sources of risk and have a system in place to mitigate them. Financial reporting is an essential aspect for any business, but it’s particularly crucial for software companies because they operate primarily on the principle of subscription revenue. Reach out to Consero and request a free demo today!
