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Why Do Small Businesses Need Financial Statements?

small business canada taxes

"Why do we need financial statements for our small business?" you might ask when you really mean "why does our small business need your accounting services?"

“Why do we need financial statements?” is one of the most common inquiries an accountant ever hears from small business owners. Most accountants take giving the answer to this question for granted due to years of expertise and familiarity.

When posed this question, many accountants can only offer a perfunctory response that usually starts with the phrase “performance measurement” and ends with the declaration that small firms require financial statements “because… well… they do.”

“Why do we need financial statements for our small business?” you might ask when you really mean “why does our small business need your accounting services?” We wanted to provide you a more in-depth response, so here it is.

Financial statements are required for lots of reasons, but here’s a look at three of the most important of them, at least as far as smaller businesses and start-ups are concerned.

1) Your Business Financial Statements Are Scorecards

The first reason your small business requires financial statements is the most basic: financial statements serve as a scorecard against which a company is evaluated. And all kinds of people might use them to ‘judge’ you. In fact, financial statements have been used by organizations to assess their own performance and communicate their past, present, and future prospects to stakeholders since Venetian merchants pioneered double entry accounting in the 15th century.

Financial statements are used by investors and potential investors to evaluate management’s stewardship of the firm, its viability, and as a starting point for estimating future performance. Financial statements are used by lenders and potential lenders to assess a company’s ability to repay debt. If they can view them, financial statements may even be used by potential hires in evaluating if working for your business will be a good idea in long term.

2) Expected Financial Statements

The second reason you need financial statements for your small business is that you are required to have them. Because financial statements play such an important part in bridging the information gap, many lenders will not even evaluate a loan application if the financials are not up-to-date.

When their banker initially asks for up-to-date financials, Many business owners react with surprise and fear. Getting a business off the ground is a daunting task in and of itself, let alone adding reporting duties, so this sense of surprise is understandable.

Unfortunately, bankers are infamous for being completely uncaring about the pressures that entrepreneurs face. If you are hoping to gain access to their capital, then they will expect that you will have immediately available access to financial statements they can use to make their funding decisions.

The same is true should you eventually seek to expand your business via venture capital funding. Any VC investor will also want to see financial statements – and probably several years worth – before they part with any of their cash.

3) The CRA requires financial statements.

The third reason your small business needs financial statements is that Canadian firms are required to prepare financial statements in order to file corporate tax. Interest on taxes owed begins to accrue if a T2 corporate tax return is not filed within three months of the corporation’s year-end (assuming flawless compliance in the past, otherwise two months).

Significant late filing penalties apply if the corporation tax return is not filed within six months of the year-end. It is critical to have financial statements prepared at least once a year in order to avoid these expenses.

The Sooner You Start, the Better

Owners of businesses in their early start-up stages are exceptionally busy. Often they are taking on all kinds of roles that will eventually, as the business grows, be passed on to someone else.

However, while it’s probably OK to tackle your own marketing for a while, or act as your own salesperson, one of the very first things you should outsource is the preparation of your business’ financial statements. These can be more demanding than most business owners realize, and working with an accountant will also help ensure that proper financial recording does not get lost in the shuffle.

Another reason to have financial statements prepared from year one of your business is one we touched on earlier. Most businesses need some form of financing to grow, and to borrow any amount that might be considered beneficial, you’ll need them. And filing taxes as a business, rather than as a freelancing individual, can have significant tax advantages as well.

Working with an accountant for your small business has lots of other benefits as well. Contact us today and we’ll be happy to discuss what those might be for your unique business.