How Important Are Financial Statements For Your Small Business?
Financial statements are incredibly important to small businesses, and here are just a few reasons why: â—?
To gauge your businesses performance
Financial statements are what your businesses performance will be measured upon, and the best and most detailed way in which to show stakeholders what the future of your business may look like, by communicating your past and present performances.
Those who are already investing in your business, and those who may wish to, will study your financial statements to assess the managements stewardship of the company, and how viable it is as a business. They will also use the statement to help them predict your businesses performance in the future. Potential lenders and those who are already lending for your company, will also study your financial statement to help them assess whether your business is able to repay its debts.
Research has shown that when accounting information is as accurate as it can be, the cost businesses must pay for capital, is decreased. When talking about capital coming from investors, the lower cost comes from the expected return, and in the case of capital from lenders, we’re talking about lower interest costs. Your business is your baby and nobody understands quite in the way that you do, and for that reason, your business can appear as a higher risk to outside parties than it is. They then go on to seek compensation to cover these potential risks, in the form of higher rates for the use of their capital.
Accurate financial statements may not reduce this risk entirely, but they can certainly help towards lowering the cost of capital. â—?
You need financial statements for loans and corporate tax returns:
All businesses are expected to produce financial statements, and because of the role that they play in bridging the information gap, there are many lenders out there who refuse to consider applications for loans if no up to date financials are produced.
Bankers will not be concerned about the stresses and strains that as a business owner, you may be under, and will simply expect a financial statement to be produced. ●
To ensure that you can make strategic tax planning decisions:
If you don’t know where your business stands financially, then it’s hard, nigh on impossible, to make strategic tax planning successful. You don’t want to end up paying more taxes than are necessary, and paying attention to your financial statements will undoubtedly help your bottom line whatever your type of business and whatever accounting method you use.
Aside from helping with planning, financial statements are vital for all other aspects of taxes, from smoothing the path for the tax return process and helping you should you happen to be audited. Financial statements have an impact on many aspects of a small business, and as a business owner, you’d be wise to heed this and make sure that yours are up to date and accurate.
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