If you asked an accountant why your small business needs financial statements, odds are they’ll look at you with disbelief, and then probably think you’re joking. To an accountant, that question is pretty much like asking, “Do I really need periodic medical checkups?” Or “Isn’t having a head with eyes a little bit overrated?”
That’s because, second to actually having a business that is successful, nothing is more important than preparing financial statements for your small business. Think that’s a little over the top? Wait until you read through this article on 4 reasons why your small business needs financial statements.
For a business, financial statements are a formal record of the business’ financial activities over a specific period. They essentially provide you an accurate snapshot of everything you need to know about your company financially, knowledge that should never be more than a fingertip away from you as a business owner. Here are 4 reasons why preparing financial statements are important for your small business:
#1: To evaluate the business’ performance
Financial statements are invaluable because they give you an accurate overview of your business. In fact, what they do is similar to giving you a high-definition snapshot of your company’s financial position.
They are basically the scorecard by which your business is measured. Since Venetian merchants first invented double entry bookkeeping in the 15th century, financial statements have been the most important tool that businesses use to gauge their own performance.
Imagine that you fail to keep track of accounts receivable, accounts payable, accruals and cash flow. How do you tell who is owing your business, how much they’re owing and where your business is falling short of money? All of this information can only be gained and understood by preparing an accurate financial statement.
If you ever thought your business was ailing and you’re wondering where things have gone wrong, financial statements are the perfect tool to do a complete troubleshoot on your business’ financial health.
#2: To use as a decision making tool
How would you feel if you woke up in the middle of the night in your distant relative’s house and everywhere is pitch black? Without a source of light, what are your chances of accurately finding the bathroom? Not very impressive, we’d think.
Trying to make financial decisions without relying on your business’ financial statement is a bit like that. Apart from giving you an accurate report of what your business’ finances are like, they help you illuminate what moves you need to take to keep your business as a going concern.
Financial statements show crucial business trends, how much you’re selling, how much you’re earning and any cash flow problems underneath. They empower you to not only take rapid decisions about your business, but also help you make the right decisions.
By preparing a balance sheet, you get an accurate understanding of your business assets, liabilities, equity and debt. This lets you know if your business is in trouble, how much trouble it’s in and where you need to focus on in looking for a solution. If you had an employee that could tell you all this with accuracy, you’d probably promote them to general manager.
At FirstLink, our philosophy is to act as a wingman to you the business owner by creating a foundation whereby we can gain insights into your business and make data driven decisions.
#3: To obtain capital from a bank or investor
No investor will take two looks at your business if you’re not in the culture of preparing financial statements. Why’s this? Just as much as you need an accurate picture of your business’ financial health, investors need an even more accurate picture so they know what they’re investing in.
Financial statements and the accountants that help you prepare them are described as being invaluable to carrying out the function of providing “the conditions of trust in a modern market economy”. If investors are to trust your business and do business with it, you must be able to provide accurate financial statements for at least a few years.
The same thing applies to getting a bank loan. No bank will approve your business for a loan or any type of credit unless they have painfully accurate information about the financial health of your business. That information is crucial for them in determining how much of a risk your business is and the chances that you’ll be able to repay the loan.
What’s more? Having accurate financial statements decreases the cost you have to pay for your business. Yes, it can save your business money in the long-run and help you attract investors of the caliber that will leave you whistling to the bank. Why’s this?
Nobody knows more about your business than you do yourself. In order to encourage others to take a punt on your business, you need to not only share that knowledge with prospective investors, but must be seen to have shared all. If potential investors begin to happen upon holes caused by infrequent financial reporting, they will assume the worst and turn tail.
By having all your books laid out with lines straight as a razor, your business assumes an unimpeachable light in their eyes, and this can influence them to invest more. At the end of the day, you’ll have only yourself to blame if investors are wary of putting their faith in your business simply because your books are not straight.
And the kicker? You never know when an interested party will walk through the door. Contrary to what most think, it’s not all the time that you attract an investor with a colorful presentation. Sometimes, just seeing how your business operates may be enough to pique their interest. But you’ll never get them in the door if you’re not armed to the teeth with the requisite financial statements.
#4: To ensure compliance with tax authorities
If the previous reasons were for the health of your business, this one is important, so you don’t end up in jail or losing your assets. Put simply, not having financial statements for your business means you risk getting into serious trouble with the tax authorities such as Inland Revenue Division. Here’s why.
Every business is liable to file tax returns, no matter where you’re based. In Trinidad and Tobago, businesses are liable to file tax returns on worldwide income. It doesn’t matter whether you had no profits. Every single business must file returns and you can only file these returns based on your financial statements where trading is occurring.
Now here’s another twist. If you do end up being assessed to certain taxes, you will be required to prove to the tax authorities that you have paid exactly what you owe in taxes. If you claim you had no profits for the year in question, you must prove to the tax authorities that truly, you had no profits. How do you provide this proof: why, by giving them copies of your financial statements and accounting source documents, of course.
If you are unable to provide proof that you have paid exactly what was due from your business in taxes, you risk enforcement action against your business. The tax authorities will be within their rights to come right down to your business and demand to see all of your books. When they start to see holes left because of incomplete or poorly prepared statements, they have a tendency to suspect tax evasion.
And the penalties for tax evasion are often stiff. These range from substantial fines and penalties and even imprisonment.
The bottom line is: financial statements are extremely key for your business. If you have not been in the habit of preparing these statements or having them prepared, you cheat your business out of so much. Worse, not having them means you have a time bomb ticking beneath you.
While there’s absolutely no reason why you cannot prepare your own financial statements as a business owner, the simple truth is most don’t know how to. And even for those who have an idea, it can be too easy to make mistakes.
It is often best to allow a professional take charge of your books and help you prepare your financial statements. Besides, remember we said financial statements lay the condition of trust in a market economy? Fewer people will trust your financial statements if you do them by yourself.
Rather than being suspected of having “cooked the books”, take advantage of the services of an accountant today. At First Link, we are a full-service business outsourcing and advisory firm which provides specialized Finance, Legal, Human Resource and Technology solutions designed for Startups and SMBs. We directly work with business owners to fulfil their bookkeeping, accounting and audit needs. If you would like to discuss your business’ financial health with us or explore our accounting solutions, please schedule your free consultation today.