Small Business Accounting: Why Financial Statements Are Important
Author: Russell SmithOctober 10, 2016
Our UK accountants talk financial statements and reports, and why you should never forget to utilise this vital process.
Small business owners have a lot to deal with and sometimes, if you manage your own finances, this can mean accounting processes get neglected. To the ears of our expert UK accountants, this is concerning.
Some financial practices are simply too important to ignore.
One of the most vital small business accounting tips we can give you is to never forget to produce financial statements. Their benefits are simply too valuable to miss out on.
What Types of Financial Statements Should You Be Producing?
There are four types of financial statement that small businesses should never forget to produce. Our UK accountants break down exactly what these are:
- Invoices: Incoming or outgoing financial transactions between your small business and a third party. Without invoices for all transactions, it can become impossible to create accurate financial statements and maintain bookkeeping practices. Simple to forget, especially on small purchases, always ensure you have a financial statement recording every single transaction you make on the behalf of your business.
- Income Reports: Invoices allow you to create income reports. These statements provide a representation of your money-making capabilities over a set period of time, often monthly or quarterly. They allow you to see exactly where money is being spent and earned.
- Balance Sheet: Balance sheets are a representation of the worth of your business at any one time. They take into account financial assets (such as income and investments), liabilities (including loans and expenditure), capital and shareholder equity to provide an accurate report on how much money your business owns and owes.
- Cash-flow Statements: What is a cash-flow statement? It’s a document that utilises data created from previous financial reports — income and balance — to show a business’ financial progress over a set period of time. These reports show details such as whether or not your company if profitable, or if profits are increasing or decreasing over time. This is often done on an annual basis, but should also be produced at any time you wish to see a situation update.
Why Is it Important for UK Accountants to Produce These Reports?
Financial statements have a variety of uses to small business owners. This sort of detailed information relating to the financial health of your company can help you complete important tasks, such as:
- Maintaining Financial Records: Statements are evidence of your company’s current and past financial health. In essence, it is recorded data. If circumstances, where evidence of your finances are required, during loan negotiations, filing tax returns or audits, having these financial records on file, can greatly reduce time wastage, admin work, stress and errors; errors caused by pouring over old and potential incorrectly recorded data.
- Making Management Decisions: By producing accurate and up-to-date reports on your business’ financial situation, you can make well-informed decisions about the direction you want your company to take. By looking at income, balance and cash-flow statements, you can analyse financial data and make changes accordingly. For example, you may notice patterns of overspending, months where income dips, or a slow but evident decline in sales of a certain product. These changes may not be obvious, which means financial statements might be the only way of spotting them before they become a problem.
- Enticing Investment Opportunities: In the investment world, “cash is king”. Some investors might have an interest in whether your business is new, innovative or unique, and are willing to take a risk, but most want empirical evidence that they’ll get their money back, and then some. Financial statements allow you to showcase the success of your business in a way investors appreciate. They also allow you to forecast for future profits, which may help entice investors, even if you are currently a risk.
- Appeasing Shareholders: Shareholders want results. They want to see the company do well, but you need shareholder confidence to stop them trying to take control of the business away from you. Financial statements are a way of inspiring confidence and appeasing shareholders. Even if the data isn’t sensational profits, it demonstrates control, attention to detail and an understanding of financial management.