The Importance of Financial Statements

The creation of accurate financial statements is a mundane but necessary task for any business. While producing company accounts is never something entrepreneurs dream of doing when they first start out, it is still something that all business owners have to do on a regular basis.

Here, we look at the importance of financial statements and why is it so imperative to ensure they are accurate. To do so, we list the top three financial statements that a company needs to complete, as well as highlighting ways you can make certain you are always producing reliable statements at each reporting period.

What Are Financial Statements?

These are the three most important financial statements your company can produce. Taking the time and care over your company accounts can help you in the future for so many reasons, so it pays to give them the attention they deserve.

Balance Sheet

The balance sheet lists out all the debts or liabilities a company has alongside all the positive assets, like inventory or cash on account. It is helpful as it outlines how much the company owes in both the near term and long-term, as well as its ability to pay those debts. Assets are also categorized as long-term or short-term.

In essence, it acts as a crib sheet for how the company currently looks and, in that way, it will provide the net value of a company too.

Cash Flow Statement

A cash flow statement is a critical part of a set of company accounts. It gives a key indication as to the health of your business and whether your business has a positive or negative cash flow. Without a positive cash flow, your company becomes illiquid and runs a very high risk of becoming insolvent – even if it has other assets.

Cash flow statements are split into three parts: operations, investing, and financing. Operations are the cash flow from your firm’s day-to-day business; investing is how much the business spends in cash on its long-term projects, and financing is the money it spends on paying off debts. They are broken down in this way so it is easy to ascertain how easily a company can cover its operating expenses, which are critical to the business running efficiently.

Profit and Loss Account

A profit and loss (P&L) statement is key for a set of company accounts, as it allows a business owner to see how profitable their business is. This statement is particularly helpful when pinpointing whether an accounting period has been successful or not – as well as highlighting the reasons as to why this is.

A profit and loss account breaks down a firm’s financial standing into revenue, earnings, and expenses. Summarising the company in this way is what helps to ascertain how well the company is doing during that reporting period. It helps a company zero in on which parts of the company are making money, and which are not – as well as providing evidence as to why.

Additionally, this is the statement that allows you to produce gross profit margins and net profit margins which are key measures for outside investors as well as being helpful internally for making improvements to the firm’s activity. 

A profit and loss account can sometimes also be known as an income statement, or statement of earnings.

Why Do Financial Statements Need To Be Accurate?

There are a number of reasons why financial statements need to be accurate. Having an awareness of them can help you to ensure that they are correct at each and every reporting period. Accurate financial reporting does take time, but it is imperative that you allocate enough energy to it to be certain that your numbers are factual and reliable. Here’s why:

Forecasting

If your company accounts are incorrect, even marginally so, you will find that your ability to forecast into the future much more difficult. In fact, forecasting into the future is impossible to do effectively if you are using inaccurate data. Forecasting is key to help drive growth at your company and ensure that it continues to run as efficiently as possible. Therefore, if you cannot forecast effectively, you are minimising your firm’s chances of being as profitable as it can be.

Past performance

In addition to looking forward, company accounts can be helpful at highlighting what worked and what did not work for the business in the past. They therefore allow business leaders to make more informed decisions about what changes are required within the company and why. Again, this will help drive growth through improved profitability in the future.

Outside investing

Company accounts are what you show outside investors when you are looking to raise funds for your firm. If your accounts are mismanaged and generated inaccurately, you will find your ability to find outside investment diminished. Again, this will affect your company’s ability to grow and reach its true potential.

Tax payments

Legally speaking, your company accounts need to be accurate to be on the right side of the law, particularly when it comes to paying taxes. While accounting can help highlight places where you can make tax savings, they are also a record of your adherence to making tax payments which are a requirement for any legitimate business.

How To Ensure You Have Accurate Financial Statements

Given the benefits that come from having accurate financial statements, as well as the legal obligation for companies to produce precise company accounts, how can you ensure that you are always creating a set of records that meet the relevant standard? Here, we detail some ways that you can be certain that your accounting records are error-free and reliable as a result.

Use a professional

It may be an added expense to your business, but using services from a company such as Finance Equation Ltd is well worth the investment. Not only can a professional highlight areas where your company can make savings, but the peace of mind that comes from having your accounts completed by a person with relevant experience is invaluable.

Stay up-to-date

One of the reasons that producing accurate company accounts can be difficult is because business owners do not stay on top of the financial side of the business. While it is tedious, it is always helpful to do little and often when it comes to making financial records. Leaving your accounts to the last minute when they have to be filed puts undue pressure on you and leaves little room for rectifying any errors.

Leverage software

There are so many software packages available on the market now that allow you to stay on top of your finances so that when it comes to submitting them to your accountant, you are not scrabbling around for information and receipts to give them. Make use of this software to its best advantage by choosing the package most useful to you, as well as taking the time to learn how it works properly. In doing so, you will ensure you are using it to its full potential which can only help you firm in the future.

Allocate responsibilities

If your company is of a size that you can allocate responsibilities for accounting outside of just your remit, it can be hugely beneficial to do so. By allocating responsibility to others, you are helping yourself break down what can be a huge task when it comes to financial data collation. Of course, this can mean solely outsourcing the task as suggested above to professionals, but asking employees to keep accurate records is also a vital to help you complete company accounts that are timely and reliable.

Why Financial Statements Are Important – Key Takeaways

Producing accurate financial statements and company accounts is key to the smooth running of a business as well as ensuring its legitimacy. Inaccurate company statements can make running an efficient business difficult, as business owners will struggle to make fully informed decisions that help drive optimum growth in the future. If statements are wrong, a business owner may make an inappropriate or unsuitable decision based on faulty data. The ramifications of such a decision can have lasting implications for the health or future of a company.

For these reasons, it can be one of the best decisions a business owner makes to leave financial reporting to a professional who has a wealth of experience to draw upon to produce company accounts that are correct and trustworthy at each reporting period.

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