28 Nov, 2022

Companies everywhere in the world must constantly evaluate and plan for their long-term performance. This requires them to prepare reports. Not only is this a good idea but it’s also completely necessary. One such crucial report is a financial report that will help the target audience understand how essential it is along with any limitations that might come up. Financial reporting, when done carefully, makes such reports truly powerful tools. However, this kind of understanding will only be obvious to those who know how to read them and learn their advantages and disadvantages. This brings us to the quarterly report and its pros and cons.

What is a Quarterly Report?

Perhaps the simplest way to describe a quarterly report is that it’s a collection of a company's financial statements which are balance sheets, cash flow statements, and income statements, which must be issued every three months. Employees or managers collect useful information from these financial documents and combine it all in one place in a meaningful way. This provides regulators, investors, and creditors with the means to learn about the company’s strategies and performance. Additionally, the quarterly report may include other important reports such as the business plan and mission statement. These help to provide direction for the company and benchmarks for management and employees.

A quarterly report is typically put out, to summarize a company’s performance and other parameters within a certain period of time. This time period falls within the company’s fiscal year. Most organizations follow a financial year from January- December and then there are others for who the fiscal year runs from October to September. For e.g., Apple Inc.

This particular financial report contains the following information:

  • A summary of the company’s financial state
  • Its financial goals, highlights, and specific challenges.
  • Solutions for challenges or financial strategies to help the company achieve its goals.

A manager may also include information from previous financial reports that allow experts to compare growth and performance measurements.

Let’s take a closer look at the types of financial documents generally included in a quarterly report.

Balance sheet

We’ve all encountered a balance sheet at some point in our lives. This is an important financial document that records a lot of vital information; namely a company’s total assets, liabilities, and equity. Reviewing the balance sheet shows you the total assets, minus the equity and liabilities. Balance sheet tracking is usually done on a quarterly basis. You may also get an assessment of the company’s current asset liquidity and debt coverage in real-time, from your balance sheet. Below, you’ll find a list of line items that are commonly found in this financial document:

  • Liquid assets - this includes cash, certificates of deposit, short-term securities, and treasury bills
  • Current assets such as accounts receivable, inventory, fixed assets, and prepaid expenses
  • Current liabilities such as short-term and long-term debt, accounts payable, payable wages and dividends, tax expenses, and prepayments from clients
  • Stakeholder and ownership equity, like retained income, receivable dividends, capital gains, and stocks

Income statement

If you need to track current activities, you look at the balance sheet. However, if you want to track these processes over a certain period, you look at the income statement. This essential document is also recorded on a quarterly basis and allows you to monitor financial processes throughout the year. Here, you’ll be able to check your company’s performance for revenue, net income, expenses, and earnings per capital share. The last item is in case your company opens shares on the stock exchange. You can also use this same document to report profits and losses. In fact, some companies refer to the income statement as the profit-and-loss statement or P&L statement. There are several key elements listed in this document:

  • Operating revenue, accounting for selling products or services
  • Revenues, both net and gross which include total sales revenue and remaining revenue after subtracting costs
  • Non-operating revenue from accrued interest, along with investment returns, royalty payments, capital gains
  • Primary expenses which include the cost of goods sold (COGS), depreciation and selling, general and administrative costs (SG&A)
  • Secondary expenses such as debt or loan interest, asset loss, and capital loss

Cash flow statement

Companies must measure the efficiency with which they generate cash to pay down debts. That’s why there’s a need to maintain and check the cash flow statement. Documenting cash flow even covers how competently companies fund operations and investments, showing the continuous activities through which revenue is generated to support expenses. A cash flow statement must include all sorts of minute details to help understand the efficiency of current practices, spending activities, and revenue generation.

Financial reporting that’s done with this document also provides investors with valuable insight into whether a business presents a higher investment risk. Unlike the balance sheet and income statement which require some calculations to record financial values, the cash flow statement simply contains four key elements:

  • Operational activities - these include accounts receivable and payable, inventories, wages, income tax, and cash receipts
  • Primary investment activities where investment earnings have been generated and used, asset sales, issued loans or credit, and payments from acquisitions or mergers
  • Secondary investment activities which include fixed-asset purchases for equipment, office space, or property
  • Financing activities such as stock repurchases, payable dividends, debt repayments and issuance, cash from investors, and cash payments to shareholders

Statement of Shareholder Equity

Shareholders' equity can generally be found on the balance sheet, however, larger organizations create separate statements to document these activities. This particular financial report includes the amounts that key shareholders and owners invest in a company. Such investments include company stocks and securities, which pay out dividends at certain periods. The other items on a statement of shareholder equity that companies typically review are:

  • Standard and preferred stock sales and repurchases
  • Treasury stock that’s been purchased, minus any reissued treasuries during the reporting period
  • Retained earnings once the dividends and losses have been subtracted
  • Accumulated income - this includes incomes from unrealized capital gains, minus capital losses

So, now that we’ve covered the different financial documents that are part of a quarterly report, let’s move on to the pros and cons of the same. Let’s start with the pros and then move on to the cons.

Allows you to get more details by doing a report comparison

Report comparison is an important task for all companies. They do it to gauge their financial growth and track their performance. The only way that they can get all the necessary information is to compare previous financial reports with more recent ones. This allows them to make an informed decision about the direction they want to move in. For e.g., if they want to measure their long-term growth, they can look at financial reports from the previous year. If they want to measure short-term financial growth, they’ll pull financial reports from the previous sales period to assess the same.

Allows you to set and track goals consistently

Companies routinely produce four quarterly reports per year. By doing this, they can properly set their goals and track how well they are performing. Each quarterly report might show them where there’s room for improvement. In turn, they can then set a goal to fix what’s wrong and achieve positive results in the following quarter.

Helps to boost trust between shareholders and management

Every time a quarterly report is released, a copy is given to each shareholder. This creates transparency with the shareholders. The quarterly report gives them a clear picture of the company’s financial standing, along with crucial details about revenue and profit. More importantly, providing them with the information directly, also helps to build trust with the company and its management team. In turn, this can also help to attract more investors.

Helps to garner interest from new investors

Building trust between shareholders and management by giving them copies of each quarterly report when they are produced is important. Companies also do this in case there might be shareholders that want to invest in the business. This is more obvious with companies that have a high growth rate as well as high profits and revenue. They may also release each quarterly report online, allowing shareholders to view them when they are looking for investment opportunities.

Now, even though we’ve shown you the pros of a quarterly report, organizations still face certain challenges with creating and analyzing one. We’ve shared these below so let’s learn what they are.

Requires a lot of time to create

Creating a quarterly report typically requires data and information to be taken from a number of sources. No matter the industry, this is a task that must be performed in order to get a clear picture of the organization’s performance, profits, and revenue. This means that financial information has to be sourced from various departments and then transferred into one document. If an organization has several income statements, cash flow statements, and balance sheets, collating this information may take longer than usual. However, if they can get access to special software then they might be able to download the relevant information a lot quicker and transfer it to a master document.

Shows sales data over a shorter period

Financial reporting is tricky. This makes it even more of a challenge for organizations that use their quarterly report to determine their performance. After all, the information in hand is generated over a much shorter time period. In order to have a more general measurement, it would be smarter and easier to use an annual report. From this particular financial report, they’d have all the information for an entire sales year, rather than just a sales quarter. Therefore, a lot of the time, organizations may compile both an annual report and a quarterly report and use them to measure their performance and goals.

May reflect lower sales figures

In financial reporting, sales figures constantly fluctuate. This often means that a company’s quarterly report may show lower sales numbers from one sales quarter to the next. Especially if the organization has had a drop in sales at some point. Quarterly reports don’t give any direct insight or reason as to why this happens. However, it’s surmised that it happens because of marketing shifts that may cause sales to fluctuate. This is why shareholders often think that the company is not performing well when they see such low numbers.

Doesn’t work well for every company

A quarterly report may not be the best type of financial report for companies that that have consistent sales. Companies that have several areas of improvement in their sales would probably benefit from such a report. Given that data is collected from shorter periods of time, a quarterly report typically reflects where there has been extensive growth along with areas of improvement.

Getting your Quarterly Report design right

We’ve explained what a quarterly report is, along with the types of financial documents from where information is taken to populate one. And, we’ve also expounded on the pros and cons of a quarterly report. Given that so much work goes into creating this financial report, it’s not a task that anyone at all can take up. This means leaving it to the experts.

The experts we refer to is DesignMyReport, the best report design agency in India. No matter what kind of corporate report you require, get our highly experienced team to do it for you. Check out the agency website for a full list of our services and portfolio of clients and work. Reach out to us at 1800 121 5955 or send us an email at [email protected].