See 9 Greatest Reasons Why You Need To Prepare Annual Financial Statements For Your Small Business

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The following are 9 Reasons Why You Need To Prepare Annual Financial Statements For Your Small Business:

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

Do you know the net worth of your small business? In other words, has it bothered you to know the current status of the capital of your business?

The Annual Financial Statements are the document where you can find all the information you need for effective planning for the future of your business.

All companies are required by law to prepare annual financial statements for their businesses.

Having said that, it is important  to make it clear that annual financial statements for big companies areis usually prepared in very great details to meet the requirements of company law.

However, annual financial statements for  your small business can be prepared in simplified  form, provided that they meet the needs of your business for comparison, evaluation and decision making.

Furthermore, it is important for you to know the direction your business is going; whether is growing or declining.

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

Annual Financial Statements: Total sales Figure

You need to know from this figure is the total value of all the goods you sold during the year.

Remember that the value of assets sold during the year (if any) must not be included in sales account.

Another advantage of this figure is that it can 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 can enable you to know whether your business is growing or not.

This figures from this account can help you to make better business decisions for the future.

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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.

Most importantly, remember that you should not include the cost of any fixed assets bought during the year.

Annual Financial Statements: Gross profit Profit

The following are details you can 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.

Related: The Importance Of Preparing Profit And Loss Account For Your Small Business

Annual Financial Statements: Net profits 

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

The net profit figure will 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 can find out the reason for the difference.

Therefore, if the difference is in your favor, you can improve upon it and more your business forward.

However, if the difference is not in your favor, you can find out what happened and work harder to bring your business back to profitability.

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

Annual financial statements: 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, the balance is the net book value of each asset.

The net assets value are then added together and shown in the balance sheet of the annual financial statements for your business.

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.

However, the above are some of the most important 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 can 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

Annual Financial Statements, Net worth of your business

Net Worth in the annual financial statements for your small business can let you know your business is worth

The following are some of the reasons why you need to know what your business is worth.

For example, annual financial statement will help you to:

  • seek funding from banks or other lenders.
  •  take out an insurance policy for your business.
  • compare the net worth of your business for this year with that for the previous year.

Thus, this knowledge will reveal the overall performance of your business and it’s financial position.

Furthermore, if unfortunately, fire or other natural disasters hit your busines,  it will be easy for the insurance company to calculate your claims.

Most importantly, if you decide to sell the business, it will 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

 

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By Samuel Ijenhi

B. Sc. Accounting [University of Benin]

Benin City, Nigeria.

info@samuelijenhi.com.ng

About Samuel Ijenhi

A graduate in Accounting, University of Benin, Benin City, Edo State, Nigeria.
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