GOOD GOVERNANCE: How important is sound financial reporting for your business health?

BY FIONA WAKELIN

The King IV report, which came into effect in South Africa in 2017, provides governing bodies with a model for good governance. One of the objectives of King IV is to encourage transparent and meaningful reporting, so that stakeholders are able to make informed assessments on the short, medium and long-term prospects of the business.

Recommended practices, regarding reporting in King IV, include the fact that the governing body should oversee the annual financial statements and ESG, and ensure the integrity of externally published reports.

Sound financial reporting and analysis have two major spinoffs: they provide insight which helps businesses remain compliant and information which can lead to improved, streamlined practices.

How does financial reporting and analysis lead to positive results for a company? Let’s dive into how it can benefit your business:

COMPLIANCE

There are many software packages which provide accurate, real time, sound financial reporting. This not only enables you to make sound financial decisions, based on constant insight into your organisation’s liquidity and debt management, but also helps to ensure complete compliance with government regulations and requirements.

CASH FLOW

Covid has brought with it a unique set of challenges and many businesses are struggling to stay afloat. Now more than ever keeping your finger on the cash flow pulse gives you a picture of your organisation’s state of financial health. Weekly reports which provide detailed data and metrics will not only help take your business’s temperature, but also provide a set of indicators which can assist with planning for either profit or loss. This way you won’t be caught unawares and can either ensure profits are sustainably invested or liabilities are red-flagged for immediate attention.

LIABILITIES

A keen eye needs to be kept on liabilities and rigorous financial reporting must be regularly presented to ensure the monitoring of loans, debt, credit cards and possible strategies to cope with defaulting on the part of major clients.

TIMEOUS DEBT MANAGEMENT

Staying on the liabilities continuum, increasing debt and decreasing equity is a recipe for business closure. It does not matter which sector you operate in, unmanaged debt will eventually sink your ship. To help keep you in the picture, there are a number of software packages which are worthwhile tools to assist with weekly financial reporting that gives you.

Gearing is a crucial part of managing business growth and stability. “Gearing refers to the relationship, or ratio, of a company’s debt-to-equity (D/E).Gearing shows the extent to which a firm’s operations are funded by lenders versus shareholders – in other words, it measures a company’s financial leverage.” – Investopedia.

To ensure your D/E ratio remains at a healthy 25-50%, debts and liabilities must be rigorously monitored.

REAL-TIME TREND IDENTIFICATION AND TRACKING

Being on the financial ball in terms of reporting means you will be aware of any movements and trends in your sector and, with your financial status quo at your fingertips, be able to make informed, agile decisions for the benefit of the company. This includes both opportunities and challenges.