I have a small business, why do I need financial statements?
Every year, Cornerstone Tax and Accounting Services receives countless questions from small business owners about their financial statements. Many of these businesses have less than 5 employees and turnover less than R1 million a year and the owners often feel that it isn’t necessary for such a small business to have and submit financial statements – this couldn’t be further from the truth.
A company’s financial statements are vital to its future growth and performance and should be one of a business owner’s top priorities. To illustrate this point even clearer, we have curated a few reasons why every company, no matter its size, should submit annual financial statements.
It lets you know if your business is making a profit and if it is solvent
Because you started your own business with the aim of making a profit it is reasonable to expect that you would want to know if you have indeed made one – you would be able to glean this and more valuable information from your financial statements.
If ever you need funding for your business or if you need to open a business bank account, financial statements will presents the business’ financial information in a structured and unbiased way that’s easy to understand so that the bank, or potential funders can see how profitable your business I and make
It’s a legal requirement to prepare financial statements
If the business was incorporated as a company or close corporation there is a legal obligation to prepare accurate financial statements within six months after the end of its financial year. The legislation requires that the financial statements must conform with or satisfy the prescribed standards, i.e. it must be in accordance with IFRS or IFRS for SMEs.
If the business, and this applies to all businesses, employs people, there are other reporting obligations in terms of the relevant labour legislation as well. Financial statements will assist in meeting these requirements.
You could be declaring the wrong taxes to SARS
At the end of the financial year, you must prepare your annual financial statements and submit them to SARS according to the Income Tax Act and Tax Administration Act. You use the figures you draw from your financial statements to submit your income tax return. If it’s wrong, you could either underpay your taxes and face penalties, or pay over too much and stress your cash flow unnecessarily.
If your business is registered as a vendor for value-added tax, the financial statements will assist with the information required for the regular submission of the VAT returns.
It is a further requirement that these financials, once prepared, must be kept for a number of years. In fact, the Tax Acts require of the taxpayer to retain these records and allow for SARS to request them from the taxpayer for review or audit purposes.
If you have any questions about your company’s financial statements, please feel free to contact Cornerstone Tax and Accounting Services for expert advice and assistance. For more useful and thought-provoking content, remember to follow us on Facebook, Twitter and LinkedIn and remember to share this article with friends, family and colleagues.
This article was adapted from “Why do I need financial statements” by Vongai Mumbula published on by SAIT (South African Institute of Tax Professionals). For the original article, please click here