What is Internal vs External Financial Reporting?

What is Internal vs External Financial Reporting?

Internal financial reporting involves compiling and analyzing financial information for use by management in decision-making. External financial reporting involves compiling and reporting financial information for distribution among shareholders and potential investors.

Internal vs external financial reporting have several key differences that you should be aware of. Internal financial reporting is a business practice that involves compiling financial information on a frequent basis for use within the organization.

The documents may contain confidential information, such as business indicators, financial performance, performance indicators, etc.. They are designed to help those individuals working within the company to make informed decisions.

On the other hand, external reporting involves preparing financial information to be distributed to parties outside the organization. Unlike internal reports, external reports do not contain confidential information about the company.

The recipients of the external reports include potential investors, lenders, and creditors who require the reports to evaluate the financial position of the company. The main external financial reports include the income statement, balance sheet, and statement of cash flows.

What Is Internal Reporting?

Internal reporting refers to data collection for internal use. Simply put, you don’t collect and analyze data to present it to a client or anyone outside of your business, but to use it within your team for different purposes, depending on report type: improving your marketing strategy, redefining your KPIs, optimizing your expenses, etc.

Internal reporting is useful both for small businesses and large companies, and they don’t always follow the same structure.

Different companies use different reporting strategies: in some, there’s only one person in charge of creating internal reports. In others, every team member has to make a report on a weekly or monthly basis and report to the manager.

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Sometimes, internal reports contain confidential information and their main purpose is to guide the managers. That’s why internal reporting is never meant to be available to external collaborators or the public.

Why Is Internal Reporting Important?

Internal reports provide managers with critical information about how their teams are performing, so they can make data-driven decisions and steer the business.

A well-designed report can help you determine what your strengths are and in what area of business you’re doing well. At the same time, you can determine where you’ve made mistakes and create an actionable plan to eliminate them in the future.

Internal reporting also helps each team member determine what they’re responsible for and what they’re expected to do. Once a campaign or an activity is over, a detailed report on it can help teams pinpoint exactly where things went south or what specific action brought great results.

Edward Mellett of Wikijob also highlights the importance of “internal communication”, which is a part of any internal report. A reporting meeting allows teams to “exchange information, knowledge, ideas, and beliefs among firm employees. It improves efficiency, and goals are easily attained,” says Mellet.

What Is External Reporting ?

External reports are meant to be shared with the public – either broader audiences or your clients, investors, external partners, etc.

In many cases, the main focus of external reporting is financial data – especially if you need to justify your spending to the client and showcase the ROI of your activities. If that’s the case, it’s critical to filter the information you’re including in the report to avoid any confidential info that mustn’t be shared outside of your company.

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External reports are sometimes used for marketing purposes, for example, to serve as a foundation for a company’s writer to write a case study or an article.

Companies may structure their external reports in different ways, but common practice is to state the goal of the report at the very beginning of the text since the audience reading it will be broader than in internal reporting.

Why External Reporting Matters

External reports can serve a variety of purposes. For instance, they may be proof of your company’s health for industry experts and analysts.

However, the main purpose for most companies is to make information available to shareholders and attract potential customers and investors. If you’re reporting to a client, it may be a good opportunity to showcase the excellent results you’ve achieved and the positive effects for the client.

Different financial reports can also be external and made public, but they don’t include confidential information. Some of these reports are even required by the law in some countries.

For many marketers, external reporting is a regular part of the job. They need to share reports with their clients, partners, or sponsors, typically on a weekly, monthly, or annual basis. These reports usually contain the most important data without going too much into detail so the client can easily understand the charts and numbers.

It’s important to emphasize that both internal and external reports are equally critical for a business. Sometimes, internal reports don’t get enough attention, according to Gerrit Buss of FourManagement GmbH. “I am convinced that the quality of the internal and external reports cannot differ when they are generated,” says Buss.

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“I have often seen that internal reports are not created with the same passion and quality as external reports. But this is absolutely wrong because the reports should also be used internally to initiate improvement measures.”