Financial Reporting: Types, Use Cases & What to Include

Financial reporting

Author:

Jaron Wright, CFA

Read time:

5 minutes

Published date:

16 May 2024

Learn the basics of financial reporting for your startup, what to include, and the different types of financial reports for your investors.

Financial reporting gives you and your investors a comprehensive view of your company's financial health, helping you track your startup’s performance metrics over time, identify areas for growth, mitigate risk, and use capital efficiently.

What is financial reporting?

Financial reporting is the process of compiling, analyzing, and presenting your company's financial data—including revenue, expenses, profit, equity, and cash inflows—into key financial statements on a monthly, quarterly, or annual basis. This information gives you and your stakeholders a clear picture of your organization's financial position and trajectory.

Why is financial reporting important?

The primary goals of financial reporting are to provide transparency, enable data-driven decision making, and ensure compliance with relevant accounting standards and regulations.

Having timely and accurate financial reports can help you:

Effectively manage debt or other liabilities and allocate budgets.
Make data-driven decisions to optimize operations, manage cash flow, and capitalize on new opportunities.
Build trust and credibility with investors, lenders, and other key stakeholders.
Stay compliant with relevant accounting principles and regulations—like U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).
Get visibility into your startup’s financial health, risks, and performance trends.
Improve alignment between finance and other strategic decision makers at the company.

Having your financial reports in order will ensure you're prepared for future financial audits as well, which are a regular part of doing business for many private companies. Many investors require startups to provide audited financials as part of their investment agreement.

Audits can feel especially stressful if you haven't gone through one before, so we made a simple checklist to help you collect all the necessary documents for your first audit.

Download audit checklist

Different types of financial reports

The three most common types of financial statements used for reporting are: your balance sheet, income statement, and cash flow statement. Often, companies will include a statement of equity and footnotes as well. Each of these give a different view of your company's financial performance and position.

Balance sheet

Your balance sheet gives a snapshot of your company’s assets, liabilities, and equity at a specific point in time.

Assets are resources owned by your company that have economic value, like cash, inventory, and property.
Liabilities are what your company owes, such as loans and accounts payable.
Shareholders’ equity represents the owners' claims after all liabilities have been settled.

As implied by its name, the balance sheet should always be in balance, where assets are equal to liabilities and shareholders’ equity. In other words, your balance sheet basically shows what your company owns and owes, as well as the amount invested by your shareholders, so you can get an idea of your company’s net worth.

Income statement (profit & loss statement)

The income statement, also known as the profit and loss statement (P&L), shows your startup's revenue, expenses, and net income over a specific period—typically a quarter or a year.

Revenue: the income generated from operating your business.
Expenses: the costs associated with generating your revenue, like the cost of selling and marketing or the cost of goods sold.
Net income: the difference between your startup's revenue and expenses.

The income statement shows revenue growth compared to prior periods, and investors will use this information to help decide if it’s worth investing in your startup.

Cash flow statement

Statement of cash flows tracks how much your startup makes and spends, helping stakeholders understand your startup's liquidity and ability to generate cash. This statement is divided into three main sections: operating activities, investing activities, and financing activities.

Operating activities: Cash coming into and out of your company's primary business operations, such as cash received from customers and cash paid for goods, services, salaries, and other operating expenses.
Investing activities: How much cash is used for investments in the business and how much is generated from the sale of those investments—like the purchase or sale of long-term assets like property, equipment, and investments in securities.
Financing activities: How cash flows between the company and its financiers (investors or lenders) as capital is raised and returned to them. Think the issuance and repayment of debt, equity transactions (issuing shares or buying back stock), and dividend payments.

Statement of equity

The statement of shareholders' equity records your company's equity throughout a defined time period. It includes:

Issuance of shares: Any activity in the outstanding number of shares like new shares issued, repurchases, option exercises, or RSU settlements.
Dividends: This section lists the dividends distributed to shareholders, offering a glimpse into the company's profit-sharing.
Net earnings: The net income or loss for the period is shown here, directly influencing the equity value.
Treasury shares: Details on share buybacks, which can affect the per-share value of remaining equity.
Stock compensation: Total expense related to stock-based compensation for the period.
Other comprehensive income: This captures financial changes not listed on the income statement, such as adjustments due to foreign exchange rates and changes in the fair value of investments.

If you’re a Carta customer, most of this information can be found in your account (minus “net earnings” and ”other comprehensive income”).

Financial statement footnotes

Notes to the financial statements provide detailed information that explain and contextualize the data presented in the main financial statements.

Key notes include:

Accounting policies: Describes the accounting methods used (for example, ASC 718).
Commitments and contingencies: Outlines potential liabilities and legal obligations.
Employee benefits and stock-based compensation: Details on employee benefit schemes and stock options.
Debt: Information on terms and schedules of the company's debts.
Fair value measurements: Explains how the fair values of certain assets and liabilities are determined.
Revenue and segment information: Breakdown of revenue sources and financial segmentation by business unit or region.
Income taxes: Details on tax expenses, payable amounts, and deferred taxes. Check out our full library of educational tax resources for companies.
Property and equipment: Information about the company’s physical assets and changes in accounting for them.

What are the use cases for financial reporting?

Financial reporting is used for both internal and external stakeholders for different reasons.

External reporting: Involves communicating your company's financial information to stakeholders outside your organization, like current or potential investors and lenders or for a potential M&A.
Internal reporting: Provides financial insights and analysis to your leadership, finance, and business teams to inform strategic decision-making. This helps leaders analyze profitability by business unit and product line, assess and manage burn rate, build budgets, and forecast profits.
Regulatory reporting: Ensures you adhere to the standards set by the Generally Accepted Accounting Principles (GAAP) in the U.S. or International Financial Reporting Standards (IFRS) globally.

How Carta can help with financial reporting

To create accurate financial reports, you need to be able to accurately “expense options,” or recognize the transfer of value involved in awarding stock options and other types of equity compensation to employees. You’ll need to include information about stock-based compensation in your cash flow statement, income statement, and statement of equity.

But, calculating stock-based compensation can get complicated, and it must adhere to strict U.S. GAAP and IFRS 2 accounting standards, as applicable, which are subject to change.

Carta’s Financial Reporting tools automatically generate your stock-based compensation report and the minimum disclosure reports included in the financial statement footnotes, ensuring accuracy and compliance with U.S. GAAP and IFRS 2 accounting standards, as applicable. Carta also provides an audit guide and personalized one-on-one support, so you have an expert by your side as you navigate the audit process.

Download first-time audit checklist

Preparing for your first audit can feel intimidating, but we’re here to help. Every auditor may ask for slightly different materials, but this list covers what most auditors will need to get started.

Disclosure

This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. Carta does not assume any liability for reliance on the information provided herein. ©2024 eShares, Inc. dba Carta, Inc. All rights reserved. Reproduction prohibited.