The Importance of Accurate Financial Statements for Small Businesses

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If you run a small business, or even a mid-sized one, you may have an informal approach to bookkeeping. Even for a small business, however, the importance of accurate and professional financial statements cannot be understated. If bookkeeping isn’t your primary job, it can be easy to make errors on important documents such as income statements, profit-loss (P&L) statements, balance sheets, cash flow statements and other critical financial documentation.

Properly and professionally prepared financial documents are the foundation for making business decisions, planning future strategies, determining the business’ success, estimating failures, and presenting a good image to the public or potential investors. Specifically, accurate financial statements play a number of important roles, as outlined in the next section.

The Benefits of Well Prepared Financial Documents

Financial transparency. There are a variety of reasons why numbers need to be right on company balance sheets. For starters, this is where you’ll get a realistic picture (and value) of the company’s assets. It’s the foundation for determining depreciation, and balance sheets need to carefully pinpoint revenue earned and what form the revenue is in (cash, for example, or outstanding receivables). The balance sheet is where numbers such as profit before tax, after-tax profit and profit after interest, depreciation and tax are determined. These figures are critical for investors, partners and would-be investors to determine the health of the business.

To determine corporate tax rates. Chances are that your tax liability is already high. Without accurate financial statements, you may be making it higher than it needs to be. To determine ways to reduce your company’s tax burden, your financial statements need to be accurate, timely and accessible.

To reduce errors. Do-it-yourself bookkeeping may result in error-laden documents. After all, it’s not your full-time job, and you may not have a background in financial management. Too many errors and you may be basing business decisions on erroneous conclusions, or you may be cheating yourself out of capital you could be using to build the business. In fact, once you engage an outside bookkeeping company for your business, be sure to have them go over previous financial statements to look for past errors that might work out in your favor.

To improve payment cycles. Is your accounts receivable department working as well as it should? Are payments lagging, leaving you financially strapped? A good bookkeeping firm can help you shore up your receivables process so you can shorten payment cycles.

In case of audit. If you’re audited by the Internal Revenue Service (IRS), are you confident your DIY bookkeeping will stand up to scrutiny? Incomplete or improper bookkeeping could leave you open to heavy fines.

Better planning and forecasting. Accurate financial statements can be the basis for future business decisions, but if your books aren’t correct, neither will your decisions be. With improperly prepared and maintained books, you may miss opportunities that would ultimately benefit your company.

Consult With a Professional

DOAAR is a small business bookkeeping, tax, and consulting services firm, with an additional focus on its clients’ personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients with a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S. Visit our website for more information or to contact us.