Benefits of Having Accurate, Relevant and Timely Financial Report
The objective and goal of any business enterprise and their owners is to make profit at an increasing proportion year in year out and grow their businesses. However, most micro, small and medium business owners and managers pay less attention to the financial report of their businesses. This is making them not to enjoy the benefits that these financial reports provide.
Financial reports can also be called the financial statements. The three main financial statements are:
- the statement of financial position or balance sheet
- the income statement and
- the cash flow statement.
These are the basic statements that business owners and managers can use in making decisions to manage their businesses. These statements can be prepared on monthly, quarterly and annually basis
The statement of financial position or balance sheet
This reflects the owner’s equity after the liabilities are subtracted from the assets.
The health of a business (whether a limited liability company or an enterprise). l can be analysed from the Statement of Financial Position at any point in time (i.e. today, last month or tomorrow). The Statement of Financial Position allows operators to forecast short and long-term cash flow.
As important as it is to review the Statement of Financial Position, few businesses ever bother to prepare it. By checking the accuracy of the Statement of Financial Position, an operator can ensure the accuracy of the Income Statement.
The Statement of Financial Position lists all the assets, liabilities and equity of the business. The formula for the Balance Sheet is:
Assets = Liabilities + Equity
In the simplest terms, assets are what the business owns such as equipment, inventory or cash. Liabilities are what the business owes such as vendor bills, loans, notes, and leases.
Equity is the ownership of the business.
It is important that assets and liabilities are properly classified in the Statement of Financial Position.
To get a clearer picture of the business, an operator should break down the Statement of Financial Position into subcategories. The breakdown is explained as follows:
- Current Assets: assets with the life less than a year (i.e. cash, credit card receivables, trade receivables, inventory and prepaid expenses).
- Property Plant and Equipment or (Non-Current Assets) Fixed Assets: assets with a life greater than a year that directly attributes to producing revenue (i.e. equipment, computers, furniture and leasehold improvements).
- Other Assets: assets with a life longer than a year that is not directly involved in the production of revenue (i.e. security deposits, trademarks and artwork).
Liabilities require a similar classification and are broken down as follows:
- Current Liabilities: debts due within one year (i.e. accounts payable, accrued expenses, short-term loans, accrued expenses and others).
- Long-Term Liabilities: debts due that extend beyond one year (i.e. notes payable or long-term leases).
There is so much information to be gained from the Statement of Financial Position. For example, a business that have large debts may have major cash flow problems. Identifying the current debts from the long-term debts on the Statement of Financial Position help determine the short and long-term cash needs, as well as the business potential success.
Businesses who take on large debts upon opening could be shooting themselves in the foot. The business may show large profits based on the Income Statement, but the business may not have money because it is paying out the outstanding debt (which is revealed in the Statement of Financial Position).
The Income Statement.
The income statement which is also known as the profit and loss statement shows the profit derived from income over a defined period of time.
The Income Statement shows how the business perform over a period of time (i.e. a week, month or year). It takes all the expenses into account, from prepaid expenses to expenses paid in the future. Overall, the Income Statement tells the operator if the business is making a profit.
The basic formula for an Income Statement is:
Revenue – Cost of Goods Sold – Expenses = Profit/Loss
The Income Statement is everyone’s favorite financial statement to review because it reveals the nature of the business success.
Income statements should be broken down into the following categories:
- Revenue i.e Sales
- Other Income
Salaries and Wages
- Employee Benefits
- General and Administrative
If revenue and expenses are broken down into specific categories, the business owners and managers can easily compare and analyze their businesses in absolute terms and both horizontally and vertically. Timely financial reporting will help to control the cost of goods sold, operational expenses and cash flow.
From there, the operator can begin making changes in policy and implementing strategies that will help the business achieve its goals.
Does the company need to increase its market share and what resources will be needed?
Is the company maintaining its gross profit merging? How much is each profit centre contributing to the gross profit?
Is the business achieving its budgets? Are the owners being paid dividend on regular basis?
These are some of the key questions that need to be addressed.
Cash Flow Statement
A cash flow statement is a valuable tool for showing if there is enough cash coming in to pay for the operations of the business. A cash flow can be projected out over several months.
While there are numerous benefits of having accurate, relevant and timely financial reports, we have identified few key benefits of financial statements.
Benefits of accurate, relevant and timely financial statement
- Understanding the Financial Health of Your Business
Businesses like human being needs health check constantly in view of the influence of political, economic, socio-cultural and technological developments in their environment. An accurate, relevant and timely financial statement will reveal the financial health status of your business. This will enable appropriate actions to be taken.
- Decision Making
Because financial statements help you to see a snap shot of your company’s financial status, they are decision making tools. Financial statements show business trends, which can reflect seasonal variation in sales, the rate at which trade receivables are collected and the rate at which trade payables are paid. For instance, in a situation where sales at particular months of the year are low the company might decide what to do to shore up sales. Difficulty in collecting trade receivables will surely necessitate change in credit policy.
- Sales Pattern
Financial statements reveal how much a business earns per week, month, quarter and year in sales. The sales may fluctuate, but financial planners should be able to identify a pattern over years of sales figures. For example, the business may have a pattern of increased sales when a new product is released. The sales may drop after a year or so of being on the market. This is beneficial, as it shows potential and sales patterns so management know when to expect a drop-in sale.
- It assists in getting necessary credit
Businesses often need credit as a part of their strategy to remain financially viable. In applying for business loans, the lender will ask for financial statements. Because in the financial statement the lender will be able to know the financial status, performance and the cashflow. Absence of good financial report makes it easy for the lender to reject any loan proposal, and this can hinder the growth of the business concerned.
- Financial Statements Will Help Prepare A Budget and Make Financial Decisions
Timely financial reporting will help you prepare a budget and make an easy way to take the financial decisions to grow the business. This makes it possible for the business owners and managers to plan the growth of their business.
- Improved financial management
Timely financial reporting helps you to examine and correct any weaknesses in your financial systems. Improved financial management allows you to focus on current financial matters and develop future plans.
- Better resource management
Due to timely frame financial report the business owners and managers will get accurate numbers of resources, therefore, they can maximize the use of all resources.
- Performance Evaluation
Under this type of accounting practice, business owners and managers may assess the performance of the Employees based on the financial performance of the business. It can also be used to measure the efficient performance of plant and machinery.
- Financial Statement aid in compliance with regulatory and tax authorities
Financial statements are essential instrument in complying with regulatory authorities especially in filing of annual returns with the Corporate Affairs Commission and also in registration with ministries, department and agencies of government. It is also what the tax authorities also want to see especially in filing for annual Company Income Tax returns with Federal Inland Revenue Service and in case of tax audit. The State Internal Revenue Service will also make a demand for financial statements when carrying out tax audit or investigation.
There was a time I went to one of the tax offices, I met a man in the tax station manager who was begging the manager for a waiver of assessment. In his pleading to the manager, the man said, he did not keep any records of account in his business and as such he did not know when he ate both the “profit and the capital”. If you are not keeping proper records of account and you are not preparing regular financial statement you will not know when you would have eaten both the profit and the capital in your business.
Having accurate, relevant and timely financial statement enable you to be on top of your business game.