Company, Trust, CC and other legal entities are usually required either by law, or the governing setup documents of that entity, to have financial statements compiled on an annual basis. To many owners this requirement just represents an annual bill of thousands of rands being forced on them. Is there any reason or value behind the financial statements that the owner gets back?
Through experiences we raise some positive points that come from having an entity’s financial statements compiled or independently reviewed professionally.
1. Tax planning and management:
SARS is a constant rumble in the ears of the tax payer. With the country’s current financial and economic climate it seems that the finance minister has his job cut out balancing what SARS collects with government spending. Regardless of what the money is meant for we’ve never come across a taxpayer who wants to pay the taxman some extra money if not required. Having accurate financial statements leads to a tax practitioner being able to accurately translate accounting information into tax information. This leads to an accurate assessment and the possibility of additional allowances and deductions given the right circumstances.
2. Review and analysis of procedures:
Whether processed by an in-house accountant or on software which employees have been using since the first computer was built, no system is infallible and human error can sneak in no matter how careful or experienced the processor. Having an outside set of eyes look through the books and interpret the information back to you, the owner, it’s easy to identify if there is something amiss with the processing. With the owner’s knowledge of the business and advice from an accountant with experience in control procedures, fixing small errors which might have been costing thousands in cash becomes more of a given and less of a challenge.
3. Knowing the potential for growth:
It’s easy to say “I’m a business man” or “I have my own company,” the harder questions are “do I have the money to invest in expanding my business“, “Can I afford this prize employee who is interested in joining my team” and “Am I making money.”
When financial statements are drawn up an accurate image is painted of the company’s financial position and trading done over the period. In most circumstances these statements will include two periods. Comparing and interpreting these two images and knowledge of the current market can answer the three hard questions above and many more which need answering. This enables the owner/manager/directors to make sound decisions which will advance the business’s position and benefit all the stakeholders.
4. The value of the business:
If a potential buyer or investor comes along there is quite a process involved in calculating the accurate value of the business. Imagine the Virgin or Coca-Cola’s of the world wanting to invest because they see potential in your business. They don’t fool around and have certain expectations. Instead of scouring about to find the necessary information you merely reach for your financial statements and, after a fair consideration of occurrences from the end of the relevant financial period and what your forecasts are, you know exactly what the value is and can give them detailed information to support this.
Another reason to know the value is for the owner/business man to measure his progress. Knowing the goal for your company is of no use if you cannot measure your progress and keep track of whether you are moving closer, or further from the set goal.
5. Peace of mind:
As an owner or business man it’s hard to have peace of mind about your finances when you do not have all the facts about what’s going on. You can watch money flowing in and out easily enough, but that won’t tell you if your business is worthwhile. When you find yourself struggling to make ends meat there has to be a reason. Accurate financials, with the relevant notes and accounting policies in place, will show you why you are struggling so you can do something about it. It will also show you whether you are working for rags or riches.
No matter how much passion an owner has for the business, the reality is that most of us can only survive a set amount of time before our cash reserves are exhausted. A failing business has the potential to drain these reserves almost in the blink of an eye, more so if the owner doesn’t realise in time that the business is heading down hill. Trends and warning signs often pop up in financial statements, allowing the owner to plug the leaks in the proverbial ship making it much less stressful to bail out water and reach the true destination aimed for.
These few points indicate the most apparent advantages to having accurate financial statements compiled by someone who knows the ins and outs of interpreting financial information. Financial statements therefor don’t only need to be a necessary evil, it can be a very useful tool. The documents should be something which the business owner, manager, directors and any other stakeholder is proud of in both content and appearance.