Internal vs External Financial Reporting

Variations between internal and external financial reporting.

Standard techniques for giving stakeholders an accurate portrayal of a company's finances, including sales, costs, profits, capital, and cash flow, as official records that provide in-depth insights into financial information, are referred to as financial reporting.

Each of these financial KPIs is critical because it demonstrates a company's overall 'health,' at least regarding the minor issue of money. 

These KPI reports don't reveal much about a company's culture or management structure, but they are critical to its performance.

Some financial analysis and reporting applications will be covered as we go along, but for now, keep in mind that these 'financial health reports' are essential for anybody trying to make educated business decisions. 

Financial reporting software and business intelligence reporting solutions provide essential data on investments, credit extensions, cash flow, and other topics. For tax purposes, financial reporting and analysis are also required by law.

Financial reporting is divided into internal and external, and there are some significant variations between internal and external financial reporting that anyone should be aware of. 

Internal financial reporting is a corporate activity that involves collecting financial data regularly for internal usage. 

Confidential information may be contained in the documents, such as business indicators, financial performance, performance indicators, and so on. 

They are intended to assist employees who work for the organization in making well-informed decisions.

Internal

Data collecting for internal usage is referred to as internal reporting. Simply defined, someone doesn't gather and analyze data to give to a customer or anybody outside the company. 

Instead, doing so to use it inside the team for various goals, depending on the report type: enhancing anyone's marketing plan, redefining the KPIs, reducing expenditures, and so on.

Internal reporting benefits small and large enterprises, although it does not necessarily follow the same format.

Different firms employ various reporting systems; for example, some companies have only one person in charge of preparing internal reports. In others, each team member is required to provide a weekly or monthly report to the boss.

Internal reports may contain secret information, and their primary aim is to assist management. That is why internal reporting is never intended to be shared with outside collaborators or the general public.

Internal reports may be of the following types:

1. Routine Reports

It's also known as general reports or periodic reports. At regular periods, these sorts of reports are presented to management.

The intervals might be weekly, biweekly, monthly, quarterly, half-annual, or yearly. Some reports are created and sent daily.

2. Special Reports

A report is created and delivered in response to management's request to achieve a specific goal, such as a Special Report. Such a special report does not address the day-to-day issue.

A special report is only provided after thoroughly studying any specific problem that demands special care.

3. Management Level Reports

There are three levels of management: top-level, medium-level, and lower-level. A report can't be beneficial to all levels of management at the same time. As a result, a report is written and filed according to the management level.

External

External reports are designed to be shared with the general public, as well as someone's clients, investors, and other external partners.

Financial data is often the primary emphasis of external reporting, especially if anyone needs to explain someone's expenditure to the customer and illustrate the return on investment of their operations. 

If that's the case, it's crucial to filter the data someone will provide in the report to ensure it doesn't contain any sensitive information that shouldn't be shared outside of the organization.

External reports are occasionally utilized for marketing objectives, such as providing a foundation for a case study or article written by a company's writer.

Companies may organize their external reports in various ways, but a frequent practice is to identify the report's aim right at the start of the text because the audience reading it will be larger than that of internal reporting.

External reports may be of the following types:

1. Reports to Shareholders

  • The shareholders, who are the true owners of the firm, are interested in learning about its success. 
  • As a result, yearly reports that comprise a balance sheet and income statement, as well as directors' reports, are created for shareholders.

 2. Report to Government

  • The government receives information on income taxes and sales taxes.

 3. Report to Credit Institutions

  • Banks and financial organizations can provide a firm with credit. In this example, they're curious about the company's financial situation. 
  • As a result, credit institutions are presented with financial performance and financial condition reports.

 4. Report to Stock Exchange

  • In general, every company's stock has been listed on one of the stock exchanges. 
  • As a result, the stock exchange authorities must receive a report in the authorized format. Furthermore, a copy of the yearly accounts must also be given to them.

The Report's purpose

  • The fundamental distinction between internal and external reporting is the aim. Reports must offer various facts and organize them in different ways to accomplish their objectives.

  • Pulling statistics and other information together to make judgments within the business, so it's more private for internal reporting. 

  • External reports provide data that is customized to the needs of clients, sponsors, and partners. 

  • The data focus more on their individual needs, such as client goals, ad budget expenditures, and success rates. Adding that no one has to waste time listening to data they don't care about.

  • When reporting internally vs. externally, the objectives of the person for someone reporting the change, and affect the facts they choose to offer. 

  • The report should always be in line with the goals of someone's coworkers, bosses, or clients.

  • When dealing with a customer, one should avoid using technical jargon and concentrate on straightforwardly giving reports. Technical details should not be discussed because the customer is only interested in the results.

Why Is Internal and External Reporting Important?

Internal reports offer managers crucial information on the performance of their teams, allowing them to make data-driven choices and lead the company.

A well-designed report may assist anyone in determining the strengths and areas of the company where they excel. At the same time, someone may assess where they have made errors and devise a strategy to avoid them in the future.

Internal reporting also aids each team member in determining their responsibilities and expected outcomes. 

A thorough report on a campaign or activity after it has ended may assist teams in determining exactly where things went wrong or what single action delivered exceptional results.

At a reporting meeting, teams can share information, expertise, ideas, and views among business personnel. It boosts efficiency and makes achieving goals a breeze.

External reports can be used for a wide range of applications. For industry professionals and analysts, they might be confirmation of someone's company's health.

The primary goal of most businesses, however, is to provide information to shareholders and to attract future consumers and investors. 

If someone is reporting to a customer, this might be an ideal time to highlight the fantastic outcomes they accomplished and the beneficial consequences they've had.

External and public financial reports are also available; however, they do not contain sensitive information. In certain nations, some of these reports are even mandated by law.

External reporting is a necessary aspect of many marketers' jobs. On a weekly, monthly, or annual basis, they must share reports with their clients, partners, or sponsors. 

These reports often offer the most critical information without too much detail, allowing the customer to comprehend the charts and figures quickly.

It's crucial to note that a company's internal and external reports are equally significant. According to Gerrit Buss of FourManagement GmbH, internal reports don't always get enough attention. 

"I am confident in the high quality of the It's important to remember that a company's internal and external reports are both important. Internal reports don't always get enough attention," according to Gerrit Buss of FourManagement GmbH

"I am positive that the quality of internal and external reports when they are prepared cannot differ," Buss says.

Internal reports aren't often produced with the same fervor and attention to detail as external reports, in my experience. This is erroneous, as the reports should be used internally to initiate improvement initiatives.

Uses of Internal and External Financial Reports

Internal Reporting

1. Gather information about the employees.

  • Employee information can be obtained through internal financial reports. 

  • Internal employee reports that offer information on employee performance, departmental operating efficiency, whistleblower actions, and other topics may be required by management. 

  • Management may use the reports to choose promotions, deployments, and layoffs.

  • When financial data suggest a reduction in a department's productivity despite additional funding, management may decide to restructure the department using the internal report. 

  • Management can also use employee reports to encourage whistleblowing, in which employees disclose acts that contravene corporate regulations. 

2. Keep track of client behavior and credit data.

  • An internal financial report may also be used to track present clients and assess how credit consumers repay their debts. It is effective in companies that provide credit terms for sales transactions. 

  • The report is used by management to assess how effectively credit clients adhere to their credit conditions.

  • For example, a retailer selling items on credit may demand that the credit department create a report detailing all credit customers, credit terms, credit amounts paid, credit amounts owed, recent defaults, etc. 

  • The information will aid management in distinguishing between credit clients who pay their bills on time and those who have missed or defaulted on their payments.

  • Management can then follow up with clients who have missed payments or determine whether to continue issuing credit or stop extending credit to them altogether. 

External Reporting

1. Provide financial information about a business.

  • External financial reports are prepared for two key purposes. The primary purpose is to notify the general public about the company's financial condition. 

  • Public enterprises must report their financial performance statistics every year under the legislation.

2. Compare and contrast opposing entities.

  • Because publicly listed firms rely on public funding, they are responsible for keeping the public informed about their financial health and activities. 

  • The public is curious about the profit or loss made throughout the year, as well as the value of assets and liabilities, dividends paid, and so on. 

  • Financial analysts often use the data to generate ratios and compare the company's financial status to its competitors.

Financial Statements: Internal vs. External Financial Reporting Purposes

Most businesses keep two sets of financial statements, one for internal reporting and the other for external reporting. 

Internal reports are generally used to assist management in making decisions during a corporation. 

Internal audits are conducted to ensure that all information reported is accurate and fair, protect the company's assets, and ensure compliance with laws and regulations, among other things.

Corporations employ internal accountants. Thus, they are uncontrolled, even though there are worldwide standards for internal auditing. 

External Reports, on the other hand, are intended to inform a wide range of users about the company's financial situation, performance, and changes in its financial position.

This includes:

  • The government
  • Shareholders
  • Financial institutions
  • Workers 
  • Vendors
  • The general public

These reports should be reasonably easy to comprehend. They are considered to be read by people who have a basic understanding of finance and business and are eager to examine the data thoroughly.

For the most part, external users rely only on these reports to make decisions. Companies should use external auditors who are not affiliated with the firm since the reports are anticipated to be credible. 

This is to avoid potential conflicts of interest or prejudice in the company's material. Internal auditors should, in theory, audit financial statements that are identical to those that would be subject to external audits.

The issue occurs when the organization decides to disclose financial statements that differ significantly from those utilized internally and externally. 

However, the company's reason for reporting two distinct reports should also be evaluated because the ethical issue begins here. 

The ethical criterion of utilitarianism, rights, and obligations, as well as fairness and equality, are all broken if the company's principal goal is to conceal the truth to avoid tax fines, attract more investors, or entice a vendor to offer a large credit limit. 

External users will almost certainly not profit from hiding in the utilitarian approach. 

Their money, assets, and tax benefits are all in jeopardy. It will only help the firm. 

In terms of the rights and obligations approach, shareholders have the right to know the company's actual financial position, and the company must inform them of the truth. 

The question of fairness and justice arises from the fact that certain users may profit from some concealment while others do not.

Almost, if not all, big corporations worldwide have long practiced keeping two sets of financial records/statements. The way sunk costs are reported is an example of this. Sinking costs are recorded in the financial statements. 

While this expenditure may be deductible as an expense for tax purposes, it is no longer relevant for management decisions. It hence is no longer necessary in the books for internal purposes. 

Keeping two books would allow firm officials to review topics that are important to them, particularly those that would impact the organization in the future.

There is nothing wrong in maintaining two sets of books, especially if the reports are under the accounting guidelines such as the GAAP or other statutory requirements required by the government. 

In this case, the company operates and is prepared under some offer from the Bureau of Internal Revenue regulations. 

As explained above, the books for internal management are for their use only and need not be shown to the public or used for taxation purposes.

How to Present the Data?

Internal and external reports have different ways of presenting data. 

Paying a specialist graphic designer to create our quarterly and yearly reports so that the layout is fluid and the reader's attention is drawn to the figures we want to stand out.

The best and most effective approach to transmitting concepts to an in-office staff is to generate precise and bulleted point reports. 

It should not only be delivered in person – if at all feasible – but also disseminated via official emails to the whole affected employees. 

External reports, on the other hand, should be simpler because they're intended for clients who may not be familiar with the industry. 

It should have friendlier wordings and tone, as contrasted to highly technical in-office reporting, and some offer sound advice:

  • When reporting externally to a customer, another excellent benefit of today's digital era is the usage of videos - for remote reporting. The customer likes it since it's highly impactful and fast.

  • Often, someone will have to defend the judgments and budget expenditures to the clients. As a result, someone should emphasize the good outcomes and statistics.

  • Even if there are internal inconsistencies, someone would favorably depict the firm in external reporting.

  • When communicating to stakeholders, someone may directly point out the inaccuracies and use a concerned tone rather than a persuading tone in internal reporting.

External reports are slightly more formal than internal reports. Internal reports should have a professional tone and avoid rude or abusive language.

External reports, on the other hand, are a step up in professionalism and are primarily concerned with selecting the appropriate words and delivering them to ensure the success of client meetings and discussions with sponsors and partners.

The level of detail in the report

Reporting internally means presenting to people who are already knowledgeable about the subject. Thus specifics are required if someone wants to enhance the plan or detect faults. 

Financial Reports

When presenting to a customer – either internally or externally – someone may need to avoid disclosing too much information and keep the report short and sweet.

When reporting internally, most don't need to teach their colleagues about their job. However, when reporting externally, it typically needs to be done. 

Because some clients may not comprehend the significance of various key performance indicators (KPI), someone must explain what each KPI implies and why it is significant to their bottom line.

Clients will have a better idea of the value provided and what they may reasonably expect if they have a better understanding of someone's approach.

Someone may be as technical as possible while giving internal information. After all, the folks in the room, even if it's technical, in most cases are internal teams who catch the drift of what the conversation is on.

On the other hand, an external report requires someone to break the report down into digestible chunks. When dealing with external reports, technical discourse is thus prohibited. 

"Unless someone explains the data to the clients or partners, they may not grasp the written report," Clark argues.

Andre Oentoro discusses how Milkwhale handles reports. "We tend to be more detail-oriented with our coworkers and never leave anything out." As a result, we go through pretty much everything. 

When working with customers, we filter the information we receive so that we don't overwhelm them with too many details and don't cause them to become confused. As a result, we only present the most important information and facts. 

External reports are shorter, use simpler language, and highlight key takeaways. In contrast, internal reports are more intricate, descriptive, and lengthier, which sums up the differences in complexity between internal and external reports exceptionally well.

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Researched and authored by Fatemah Kamali | LinkedIn

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