The importance of accurate financial reporting

My particular interest is in auditing and how it helps companies with sustainability, whether that is financial sustainability or environmental sustainability. Both are linked. Having up to date financial data to ensure a business’ long-term health, also helps with the identification of efficiencies. This can be used to inform more efficient business operations and lead to greater profitability. Making a profit, even a small one, can be the difference between surviving or going bust.

Auditing a company’s accounts tells us that the numbers being reported by that business are accurate. An independent audit provides ‘comfort’ and ‘confirmation’ of how the numbers are reported. With certainty comes reliability; knowing that these numbers are accurate means they can be used to inform decision making. They provide a snapshot of the business’ financial health at a point in time. It helps business leaders make relevant and informed operational decisions. If this financial information has been collected and reported accurately (and consistently) over a given period, it means the business’ performance over this time can be scrutinised, helping leaders identify trends such as changes to taxation or increases in raw material costs. This in turn can feed into strategy development.

Take energy saving measures for example. Creating a more environmentally sustainable estate, ensuring that buildings are properly insulated and maintained, or investing in more energy-efficient office equipment can deliver monetary savings. Whilst this may require increased upfront costs, the costs will be recouped through future savings. It also means that the value of buildings would be greater in the event of them being sold. Some business owners and leaders are already looking at upgrading their properties and capital to minimise energy costs.

Another reason to make these investments is that customers and consumers are taking a keener interest in businesses’ green credentials, especially in the supply chain. We have seen many large organisations focus on sustainability of late. Having sustainable supply chain credentials can boost a brand and a business. UK businesses are increasingly reporting their carbon consumption along with their financial results, and also communicating the actions they are taking to reduce carbon emissions. The numbers reported here can provide a fascinating insight into businesses’ efforts to reduce carbon usage and make their operations more sustainable. Interrogating the numbers

It is also valuable to compare numbers over time. By comparing these with budgets and forecasts in financial reporting, leaders and managers can develop a set of key performance indicators (KPI’s). These are different for every business in every sector; in some companies it could be customer retention or average income per customer, in others it could be debtor recoverability days or inventory turnover days. Each business’ KPIs are specific to them; it is important, indeed ‘key’, that they are developed in a timely way and that the information they provide on performance is considered.

In a hotel business for example, one of the KPIs could be the number of guests. Knowing in advance how much occupancy there will be indicates how many staff members need to be working at a given time. Getting these key ‘assumptions’ or calculations wrong can massively impact on budgeting, causing costs to spiral unnecessarily. This is a timely topic right now; with inflationary pressures in the economy such as wage and energy price rises, as well as a weak currency making imports more expensive, getting assumptions or calculations wrong can have a significant impact on a business’ financial performance and sustainability.

Budgeting and forecasting are also linked to financial reporting. Without good budgeting, it is very hard to run a successful business. A good budget should be based on realistic expectations, and it should factor in both potential upsides and downsides. This also links with risk management and an understanding of the risks facing a business. By identifying and understanding what could go wrong and developing plans to minimise the likelihood of this occurring, or mitigating the effects of such occurrences, managers can identify what their biggest risks are. This kind of process needs to be done regularly to reflect the ever-changing business environment. Specific risks can be more or less likely to affect a business over time.

Strategy should be informed by more than financial results alone. This process should include horizon scanning; if fuel and transport costs continue to increase, will more remote and home working change business practices? How else will these cost increases impact budgeting and the workforce? Will it open up other labour market options for example?

Tapping into the green agenda can help drive efficiencies within business operations. Making business operations more efficient should not just be for financial or reputational purposes. Improving environmental sustainability will benefit production processes and reduce the consumption of assets. It can also highlight ‘inefficient’ areas where further action is needed. The pressures inflicted during a difficult trading and operating environment can encourage investment in projects to minimise costs over the long term. Any inefficiency ultimately results in excess consumption of assets; this negatively impacts environmental sustainability.