Archive for July, 2013

Five Reasons Why It Is Important for Business Owners to Prepare Financial Statements

July 16, 2013


As a business owner you may have a very good sense of the profitability of your business.  You are aware of revenue because you are intimately involved with your customers and the sales process.  You see the bills that come in from vendors and know the payment terms you have negotiated with them.  You purchased the assets owned by the company, and arranged for their financing.  And likely the most important factor by which you gauge your company’s financial health is the cash flow that comes into the business.  So why is it important to prepare financial statements on a monthly and quarterly basis?


Five Reasons to Prepare Financial Statements

Even though a business owner has deep insight into his company operations, financial statements can reveal a different picture of the company’s true profitability. Taking time to prepare financial statements each month and quarter equips the business owner with current information to make informed, intelligent decisions affecting the success or failure of day-to-day operations. The information is also important to outsiders such as lenders, investors, suppliers and customers who rely on financial information to make decisions about whether they will do business with a company.  Typically a company closes its books within a few days after month’s end.  Establishing a process for financial statement preparation and sticking to a regular schedule not only ensures that financial information is up to date but also that it is available when unexpected circumstances arise.   Scrambling to pull financial records together, especially if statements have not been routinely generated, can put the business at a competitive disadvantage in time sensitive situations such as when the need for working capital arises.  Here are five reasons to maintain current financial statements:

 1)      Banks require financial statements as a prelude to determining whether or not to loan money.  Current financial statements are used to determine the likelihood that the company can pay back current or future debt, either from expected future income or from the sale of assets.  Even with a history of successful loan repayment, it is a certainty that a lender will require updated statements before considering a new loan request.  And, once the loan is granted, the lender will require periodic financial statements in order to monitor the continuing creditworthiness of the business and to help spot potential barriers to prompt repayment.  

2)      Investors need financial statements to analyze investment potential in terms of the risk that is present in an investment opportunity as well as the kinds of rewards or returns that can be expected.  An investor who puts money behind a company with the intent of making a financial return needs assurance that it is investing in a quality company with a strong balance sheet, solid earnings and positive cash flows.

3)      Suppliers may require a company’s financial statement before committing to selling their product to a business. They use financial statements to ascertain the risk involved in receiving payment by understanding the value of their product to a company and by assessing the price that they are charging for the supplies.  Payment terms and delivery quantities are often dictated by the buyer’s financial risk profile as portrayed in its financial statements.

4)      Customers require financial statements to decide whether a company can meet their needs for product delivery. This is important where customers are dependent on the goods/services they buy from the business.  Financial statements reveal the viability of a business and likelihood of continued operations to produce supplies and services, as well as its capacity for order size.

5)       Nearly every business owner will, at some point, terminate his ownership of the company.  Often, that is accomplished through a business sale.  The single most important source of information a prospective buyer of a business will want is the seller’s financial statements, usually going back several years. The financial statements reveal financial/operational trends and will be a critical to negotiating a sale price and committing to the purchase.

A few more reasons for preparing financial statement include:

  • ·         They are necessary to prepare federal and state income tax returns. 
  • ·         In the event that claims for losses are submitted to insurance companies, accounting records are necessary to substantiate the original value of fixed assets.
  • ·         If business disputes develop, financial statements may be valuable to prove the nature and extent of any loss.

Preparing monthly, quarterly and annual financial statements on a timely basis provides internal and external sources with the information needed for decision making purposes and is critical to a business’ competitive advantage.

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