10 Greatest Benefits Of Preparing Annual Financial Statements For Your Business

The following are the 10 Greatest Benefits Of Preparing Annual Financial Statements For Your Business.

  • Total Sales
  • Total Purchases
  • Gross Profit
  • Profit and Loss Account
  • Net Profits
  • Fixed Assets
  • Current Assets
  • Current Liabilities
  • Net Worth of your business

As a small business owner, there is every need for you to keep records of your business transactions.

Furthermore, it is important for you to know the direction your business is going.

This article is, therefore, focusing attention on some of the advantages of preparing annual financial statements for your small business.

Annual Financial Statements: Total sales Figure

One of the things you should know from this figure is the total value of all the goods you sold during the year.

However you should note that the value of assets sold during the year (if any) should not be included in sales account.

Another advantage of this figure is that it will enable you to compare your sales figure for this year with that for the previous year.

Most importantly, comparing the figures for the two years will enable you to know whether your business is growing or not.

This should also enable you to make better business decisions for the future.

Total Purchases Figure

One of the advantages of total purchases figure in the annual financial statements is that it will enable you to know the total cost of all the goods you bought for sale during the year.

Moreover, total purchases figure will enable you to find out if you:

  • Made more purchases this year but made less profits
  • Or made less purchases and made more profits.

Remember that you should not include the cost of any fixed assets bought during the year.

Gross profit Profit

The following are details you should know from the Gross Profit figure:

  • Gross profit for the year
  • Calculate gross profit as a percentage of sales
  • Work out the rate of your stock turnover
  • And other important ratios
  • Compare the figures with those of the previous year.

Furthermore, if you analyze the gross profit figure, you might be able to know if some dishonest employees stole  your stocks during the year.

Profit and Loss Account

The Profit and loss account is where all the expenses of your business during any given period are shown.

The following are the advantages of profit and loss account:

  • It will enable you to know the expenses that you cannot avoid.
  • Those expenses that could be reduced
  • Show those expenses that should be totally avoided

After deducting all the expenses from income from all sources, what remains is known as the Net profit for the year.

Net Profit figure is very important. It is what investors,  shareholders, banks and tax authorities will want to look at.

Net profits 

The Net profits figure  in the annual financial statements discloses whether you made or operated at a loss.

The net profit figure should enable you to compare the figure for the current year with that of the previous year.

If you notice a large difference between the two figures, you should find out the reason for the difference.

Therefore, if the difference is in your favor, you should improve upon it.

But if it is not, you should work harder to bring your business back profitability.

Most importantly,  net profits figure should enable you to make better decisions for your business.

Fixed assets 

This account shows all the fixed assets owned and used by your business.

Fixed assets include Plants, motor vehicles, tools, generating sets, furniture and other office equipment that your business uses to generate revenue.

After deducting depreciation, it should show the net book value of each asset.

The net assets value are then added together and show in the balance sheet of the annual financial statements.

Current Assets

Current assets (also known as circulating capital) in the annual financial statements of your small business is the total value of the following items, among others:

  • Cash in hand
  • Balance at bank
  • Stocks
  • Work in progress
  • Debtors
  • Prepayments
  • Short-term investments
  • And others.

Please note that there are other items that are not included above.

The above are some of the basic items you will find in the financial statements of many companies.

Annual Financial Statements: Current liabilities

Another advantage of annual financial statements for your small business is that it will enable you to know how much your business is owing.

It should include, among others, the following:

  • debts owed to suppliers
  • Bank Loans (if any)
  • Unpaid salaries
  • Rents not yet paid
  • General Expenses not yet paid
  • Unpaid dividends (if any)
  • Taxes not yet paid
  • And others

Net worth of your business

Yet another advantage of Net worth in the annual financial statements for your small business is that it will let you know how much your business is worth.

There are many reasons why you need to know how much your business is worth.

Firstly, it will be helpful if you decide  seek funding from the banks or other lenders.

Secondly, it should be very helpful when you want to take out an insurance policy for your business.

Thirdly, it should enable you to compare the net worth of your business for this year with that for the previous year.

Thus, you will be in a better position to know whether or not your business is growing.

Furthermore, should the entire business be damaged by fire or other natural disasters,  it should be easy for the insurance company to calculate your claims.

Most importantly, if you decide to sell the business, it should be easy for you and the buyer to negotiate the terms.

This is because both of you will be looking at the figures when negotiating.

In conclusion, you can see from the above that the advantages of preparing annual financial statements for your business are worth much more than the costs of doing so.

If you do not prepare annual financial statements for your small business,  you are just like a pilot flying an airplane without a compass.

Related: 13 Most Important Accounting Books You Should Keep For Your Small Business

Samuel Ijenhi

info@samuelijenhi.com.ng

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