The 3 Key Benefits of Financial Transparency for SMEs
“Clarity and transparency matter. More than two out of three investors said they would apply a bigger discount to a company if its corporate reporting lacked clarity. Good reporting can also help to strengthen financial markets and ensure that capital flows to where it can be most usefully invested.”—ACCA (the Association of Chartered Certified Accountants) Global Research, Understanding Investors: Directions for Corporate Reporting
This statement concluded by ACCA’s study participated by 300 investors is absolutely telling on how venture capitalists put serious importance on financial transparency and accountability when making big decisions. We always read and hear about this, but why do some of the greatest companies still veer away from the practice? To avoid short-lived success and survive the investor landscape, we reiterate the importance of financial transparency and how it greatly contributes to the growth of any business.
Financial statements serve as the main guide to fully analyze a company’s business operations and strategies, and that’s why any investor would rely heavily on these for deciding on where to put their money. While some companies would rather mask than disclose financial information, businesses should definitely consider the value of having their financial performance out in the open. High-quality and truthful financial reports indicate that the company is doing well, minimizing the feeling of a “risky move” for investors.
Building integrity into your business starts with accountability and transparency, and that definitely takes a long time to prove. However, that acclaimed name could be gone in a snap due to financial reporting frauds.
Take for instance, Toshiba’s billion-dollar scam, which showcased an overstated net profit of $1.2 billion, as the company was pressured to present gains.
Eventually, the SEC Surveillance Commission deemed this too good to be true, and indeed it was. In-house investigators have revealed inappropriate accounting entries from fiscal year 2009-2014, resulting from pressure imposed by higher management to meet unrealistically high targets, leading to augmented financial figures to present a favorable outcome. And what did this bring Toshiba? A disgraced, tainted name despite being an industry leader in electronics for a very long time.
Better Chance of Credit Grant
Accurate financial reporting done consistently and effectively serve as a leverage for growing businesses that are loaning from the bank without any considerable collateral. Financial statements contain the significant information needed for banks to base their lending decisions on, and again, high-quality and truthful financial reports lessen the need of requiring a substantial collateral.
Transparency in financial reporting should never be taken for granted, as it can really make or break one’s business. All organizations should have a financial transparency system in place for it is essential in investments and in doing business, and undeniably pays off especially when the inevitable time of judgment comes. Reflecting the importance of financial transparency in business in your business culture will benefit your business in more ways imaginable.
This blog was first posted 26 April 2016 and edited 27 October 2020.