Is Financial Reporting Really Necessary for My Small Business?
For any type of business and the people who run it, the importance of accurate and proper financial reporting cannot be underestimated. Small businesses are no exception. Financial statements can give you information on how cash is handled, business income, capital expenditures, business trends, cash flow, and company balance sheets. The numbers revealed through these statements play an immense role in providing a picture on how the business is currently running, determining success, estimating failures, planning strategies, making decisions, and telling the world (and yourself) the story of your company.
Financial Reports are Your Scorecard
The first and one of the most important reasons your small business needs financial reporting is simple: financial reports are the scorecard used to measure your business. Bookkeeping dates back to the 15th century and is still used by businesses today to gauge their own health and performance. Moreover, this scorecard is how you communicate your businesses past present, and future to the world – or simply future prospects and stakeholders.Potential investors look to financial reports to assess the financial stewardship or accountability of an organization, the viability of the business, ability to pay debt, and a means of forecasting a business’s future performance. Financial transparency simply isn’t for big spenders and large pocketbooks, but a means to drive result-driven solutions and opportunities for businesses small and large alike.
Financial Reporting Help Mitigate Errors
Even your balance sheets smallest numbers can have a huge impact on your business. Assets don’t hold the same value as when they were originally purchased and revenues need to be accurately broken down into cash and accounts receivable. The accuracy of these financial statements is essential to catching internal wrongdoing and costly mistakes. If anyone has been taking part in unethical or illegal activity, there is no better way than catching it through discrepancies in the numbers.As a small business manager, it’s important to take the time to analyze your company’s financial statements even if an accountant or tax advisor is responsible for running the numbers. Because you will ultimately be held responsible you want to verify that any and all information is correct to your knowledge and reconcile any errors. Accurate financial statement can also display trends in efficiency, as well as areas of opportunity or growth that could be beneficial to your business.
Financial Statements are Expected
In this day in age, it’s hard to do anything without financial statements backing you up. Most lenders and financial institutions won’t even consider your business’s loan application without financial reports that are up-to-date. It’s common for people to feel anxiety and shock when their banker first asks for these details. Getting a new business off the ground can be an overwhelming experience without the piling on of additional responsibilities.No matter what size your business is, the day will come when you will need proper financial reports and it is imperative that you be prepared. Having your financial statements ready when someone asks for them will not only make you feel confident, but will help people see your small business as a professional organization and worthy of a potential investment.
Financial Reports are Required by the IRS
The final reason that your small business needs financial statements is that, in order to file corporate tax returns American corporations are required to submit to financial reporting. While the type of business you are in will affect the records you need to keep for federal tax purposes, almost all business (except in a few cases) are required to clearly show their income and expenses. It is critical to have proper financial reports and statements ready if the IRS ever decides to audit your business or has any questions about the income and expenses that you’ve claimed.
Proper financial reporting is the key to running a successful small business. In addition to being required by the IRS, thorough and accurate financial statements make it possible for business managers to assess and analyze the company, manage a potential crisis, develop strategies for a better business, and accurately determine your current/future financial health.
In summary, the value of financial reporting as a performance measurement is two-fold:
- Financial reports provide a necessary performance gauge that you can use to determine and review your small business’s success.
- Financial reports work to bridge the knowledge gap between your business and the rest of the world, which in turn can aid in reducing your company’s cost of capital.
- Potential lenders and investors expect financial reports.
- The IRS requires that American corporations both small and large to hold accurate financial statements to file a corporate tax return.