Every business, small or big, deals with money. Its common purpose is to earn profits. When it comes to business, money needs to be accounted for with the help of financial statements. Financial statements bring transparency around where the money came from, where it went, and how much is left. These statements help the business smoothly communicate complex financial numbers to stakeholders, creditors, customers, employees, and potential investors. Most small business owners realize the importance of a financial statement when they apply for a loan, file taxes, look for a buyer for the business, or are out of cash. 

What Are Financial Statements? 

Every company in the world prepares financial statements per set accounting standards, making businesses comparable and compliant. Three types of financial statements together show the complete financial situation of the company. 

Income Statement 

It records all income and deducts all expenditures to arrive at profit and loss. 

Balance Sheet 

It records all assets (cash reserves, machinery, receivables), liabilities (loans, payables), and shareholders’ equity (retained profit) to determine a company’s worth as of a particular date. 

Cash Flow Statement 

This records the cash exchange to show how much cash is available to the business. 

Many Uses of Financial Statements

While the financial statement is commonly used to communicate the financial health of a business with third parties and regulators, they have other uses.

Corporate Tax Filing

The most well-known use case scenario of financial statements is calculating your taxable income and filing taxes. As a business owner, you must pay advance and goods and service taxes. However, you can reduce your tax bill by claiming business expenses that are tax deductible. When you claim tax deductions, report it in detail and have supporting documents handy for at least six years. 

If your tax filing comes under the Canada Revenue Agency (CRA) scrutiny or audit, the agency will ask you to submit financial statements and documentary proof. Having a complete and compliant financial statement can protect you from hefty penalties. A professional accountant is well-versed in accounting standards and can help you file your taxes accurately and timely. The accountant can also handle CRA audits smoothly. 

Communicate with Stakeholders and Investors 

Another reason many small business owners prepare financial statements is when they need external funding. Banks, government agencies, and private equity investors need to complete financial statements, business models, and other documents to approve a loan or grant funding for your venture. Financial statements speak the language of investors and give them all the information they seek in three tables. 

A transparent financial statement can help investors assess the potential of your business to repay debt and give returns. Moreover, these statements can also help you poach the right talent or business partners. Sometimes, big companies also look at the financial statements of small businesses before considering them for a major contract. It helps them understand if the small business has the financial flexibility to take up the responsibility of a huge order. 

Manage Business Finances

Not just external stakeholders, financial statements also help you communicate with your business and stay updated about your finances. Financial statements can help you evaluate your company’s profitability, liquidity, debt levels, and cash flow. Recording every stage of your transaction keeps you in control of your finances. 

The cash flow statement will tell you how much money you have received and payments receivable and payable. You can calculate a buffer period between payables and receivables and follow up with clients. You will know beforehand if there is any cash crunch and can work out with the creditors or look for alternate sources of finance before going out of cash. 

The balance sheet will keep you updated on the business debt levels, both short-term and long-term, and available cash and investments. If too much debt is on your balance sheet, you can focus on debt repayment. If there is excess cash reserve, you could consider investing in your expansion plans. 

The income statement will help you determine returns on investments (ROI) through profit margins. Suppose you invested $10,000 and made a net profit of $11,000; you know that investment has earned you a 10% return. If your borrowing cost exceeds your ROI, you can restructure your debt and look for cheaper alternatives. At every point, financial statements can help you optimize your business finances only if you use them effectively. 

Make Informed Business Decisions and Strategies 

Making a business decision in isolation without knowing the state of your finances can be dangerous. Your business decisions need to be pragmatic and workable. You can analyze your financial statements, estimate expenses, profits, and cash flows under different scenarios, and plan accordingly. You can also study historical statements to identify trends and gaps in revenues and expenses and work towards filling those gaps. This can help you make better and more effective business decisions and track the implications of your decision. 

For instance, your income statement can indicate whether your business is profitable. If it is making losses, you can identify areas where a significant portion of your money is going and make targeted cost cuts to improve profits. 

Estate Planning 

As your business grows, you won’t be able to keep a tab on every transaction. You will have to delegate authority to your employees and heirs. Financial statements can help you prepare complex estate planning structures that can be used to transfer ownership tax efficiently. You can calculate an estimated capital gain tax liability and make arrangements. Even after transferring ownership, you can stay updated about the business finances with financial statements. 

Mergers and Acquisitions 

Some business owners might consider selling their business to a third party. At such times, financial statements play a crucial role in due diligence and calculating business value. 

These are just a few uses of a financial statement. They come in handy in many ways. For instance, if there is an ongoing court case, the court might ask you to present your financial statement. It is a good practice to take financial statements seriously and prepare them accurately and timely for the smooth functioning of the business.

Contact Glenn Graydon Wright LLP in Oakville to Help You with Your Business Accounting Needs 

A professional accountant can help you prepare and maintain transparent and compliant financial statements. To learn how Glenn Graydon Wright LLP can provide you with your accounting and bookkeeping services, connect with us online or by telephone at 905-845-6633.