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The importance of accurate financial statements

Sep 21, 2017

Different stakeholders may find use in financial information.

1. Management

All financial decisions ultimately come down to an assessment of marginal benefits and marginal costs.  Businesses want to make a profit.  By performing financial analysis and planning, owners can make the best financial decisions based on past financial information.  The following questions can be answered by financial analysis: Can I afford to employ another employee? What salary can I afford to pay my employees? What salary can I afford to pay myself? Financial analysis is also important to identify seasonal trends and to calculate profit margins.

Emphasis must be put on a cash flow analysis.  Profit does not always equal cash flow.  By providing terms to clients, capital is needed to pay the bills while you wait for payment from your customers.  Financial analysis will help you decide if you can afford to give your customers terms, and what terms will best suit you.

2. Creditors

Cash flow can be improved by applying for payment terms from your creditors.  For creditors to approve terms, they will need to see past financial statements to satisfy themselves that it is safe to provide terms.

3. Investors

Growing a company might require substantial capital.  A good financial decision might be to borrow funds rather than provide the funds from the business’ cash flow.  Banks and other investors will require financial statements, many times audited, before approving a loan.

When a partner wants to buy into the business, financial statements are required to calculate the value of the business and the buy in price.

The same applies when the owners decide to sell the business.

4. Government

To enable a company to submit accurate tax returns, financial statements need to be drawn up to reflect income, expenses and profit/loss.  SARS also require information regarding assets and liabilities and will from time to time require businesses to submit financial statements to verify the tax returns submitted.