Why do I need financial statements if I have a small business?
24 May 2016
Posted by: Author: Vongai Mumbula
Author: Vongai Mumbula (Fleet Street Publications)
"I have a small business which my wife and I started in 2014. We’ve got one employee and our turnover was R890 000 last year.
We’re not even VAT registered. So do I really need financial statements if it’s a small business, and why?"
This is a common question we get.
And while I thought the answer was obvious… I was surprised to see that so many of the members were interested in the answer.
Let’s look at what our expert has to say on why your small business needs financial statements...
Three reasons you need financial statements in your business
If you run a business, you must have financial statements. Here’s three reasons why.
1. To know if your business is making a profit and is solvent
As one engages in a 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. The financial statements would provide you for the profit of your business (as sole trader) for the period or the financial year.
If you need to get funding for your business, and in some cases to open a bank account, you need to have financial statements. They present the business’ financial information in a structured way that’s easy to understand. And they present a proper picture of your company’s finances. So the bank, or potential funders can see how profitable your business is.
In the question above it is clear that the individuals are in a partnership and the same reason would apply to the partnership.
2. 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 persons there are other reporting obligations in terms of the relevant labour legislation as well. Financial statements will assist in meeting these requirements.
Read on for the third reason why you need to have financial statements in your business.
3. 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.
There you have it, now you know why you need financial statements, even if you’re a small business.